October 18, 2010
By Dean B. Thomson
As many contractors already know, for the past year or more, MnDOT has been engaging in a process to revise its implementation of the federal Disadvantaged Business Enterprise (“DBE”) program. The result of this work, the new “Disadvantaged Business Enterprise (DBE) Special Provisions,” were released by MnDOT last month and will take effect beginning on the October 22, 2010 project letting.
This paper will outline the most important changes contained in the new Special Provision. However, every contractor contemplating bidding on an MnDOT project to which the DBE program applies is well-advised to read through and become familiar with the entire Special Provision. Other state agencies may also adopt all or part of MnDOT’s new Special Provisions give the many meetings among stakeholders before MnDOT issued the provisions.
DBE Program Basics
DBEs are generally minority- or female-owned small businesses; they are certified by state agencies as DBEs if, upon investigation, the state agency concludes that the DBE and its owner are sufficiently socially and economically disadvantaged. The DBE program applies to state transit or transportation projects that are federally funded. Recipients of such funds (in Minnesota, this includes MnDOT, the Metropolitan Airports Commission (“MAC”), and the Metropolitan Council) must set yearly goals for participation of DBEs in federally-funded projects statewide.Recipients may also set “contract goals” – goals for DBE participation on specific projects. Recipients must then require contractors bidding and working on such projects to document either that the bidder met the contract DBE participation goal or that it made “good faith efforts” to obtain enough DBE participation to meet the goal.
While the DBE program is set out in the federal regulations (49 C.F.R. Part 26), state recipients primely set their own guidelines regarding how they implement the DBE program on a day-to-day basis. Recipient implementation of the DBE program varies widely.
MnDOT’s Special Provision: The Major Changes
Five Day Limit. The biggest change in the new Special Provision is that the low bidder now has only five days after bid opening to submit all its documentation of good faith efforts. Previously, the low bidder often had weeks or even months to submit its good faith efforts documentation. The bidder could also submit follow-up documentation or make additional efforts recommended by MnDOT. MnDOT perceived that system as taking too long and as encouraging bidders not to attempt to contact DBEs unless and until the bidder was revealed as the low bidder. Therefore, the time for good faith efforts submissions is now limited to five days after bid opening. Follow-up submissions, additions, or additional efforts will not be considered. The documents required include:
The Special Provision notes that MnDOT will review the documents and issue a determination regarding the contractor’s compliance within “approximately” 10-12 days.
Appeal of adverse determination. The Special Provision allows the low bidder to request administrative reconsideration if the Office of Civil Rights rejects the bidder’s good faith efforts. The low bidder’s written request for reconsideration must be received by the Office of Civil Rights within five days of the low bidder’s receipt of the Office of Civil Rights’s rejection. The low bidder will then meet with the Reconsideration Official. The Reconsideration Official will issue a determination within five days of this meeting.
MnDOT to approve DBE replacements. Occasionally, subcontractors default on the subcontract obligations. The same can happen with DBE contractors. When this happens, the prime contractor must, under the federal regulations, attempt to replace that DBE with another DBE (or otherwise replace the lost DBE participation). MnDOT’s new Special Provision states that before a DBE may be terminated and replaced, the prime contractor must request approval of the replacement in writing, and MnDOT must approve the replacement. Unfortunately, MnDOT has not seen fit state any timeline for approving the terminations/replacements. MnDOT could potentially take a long time to approve a justifiable termination – while in the meantime, the prime contractor cannot replace the DBE or move forward with the DBE’s work (at least, not without taking a risk.)
DBEs must be certified prior to bid opening. Previously, a contractor could count DBE participation from a DBE that became certified after bid opening. This has been useful – for example, when a prime contractor discovers a small business it could utilize on a project and encourages the business to apply for DBE status, to the mutual benefit of the prime contractor and the new DBE. But this will no longer be permissible under the new Special Provision. It is frankly unclear why MnDOT has decided that only the participation of DBEs certified prior to bid opening may be counted on a given project; there is no such rule in the federal regulations. It is possible that, under special circumstances (for instance, where a prime contractor is seeking to replace a DBE mid-project), MnDOT might consider waiving this rule upon application.
New forms. The new Special Provision includes a battery of forms that bidders must submit as documentation of their good faith efforts. Some of these forms – for instance, the bidders’ list – are largely unchanged from the previous forms. Some, like the Exhibit A, are substantially changed. Some are entirely new. Contractors should make sure that all their forms conform with the new forms.
Prompt Payment. The prompt payment provision states that prime contractors must pay subcontractors within 10 days of the primes’ receiving payment from the state. While this is no change from the normal rule, the provision then goes on to state that the prime contractor must also pay the retainage to their subcontractors within 10 days of completion of the subcontractor’s work. The provision does not specify that the prime must already have been paid by the government. This provision is troubling, as prime contractors could be forced to pay their subcontractors’ retainage long before the government pays the prime’s retainage (assuming the government pays). However, MnDOT has released a letter that seems to state that the retainage payments should be hinged on payment by MnDOT. This issue is consequently still unresolved.
New sanctions. The new Special Provision states that, in the event of contractor noncompliance with the DBE program, MnDOT may withhold payments or deduct from the contract proceeds. The Special Provision further states that “[i]f the contractor fails to complete its work on the contracts executed with DBE firms, as required by this contract, and the failure is through no fault of the DBE firms, MnDOT may deduct a sum equal to the portion of the DBE commitment not fulfilled.” This appears to be a penalty rather than a liquidated damage as the amount of the deduction is not correlated to the amount of damage suffered by MnDOT or the DBE program.
Drop shipment for DBE suppliers. It has long been a thorn in the side of both DBE suppliers and prime contractors that MnDOT has prohibited DBE suppliers from drop-shipping supplies to the jobsite. Drop-shipping is industry standard and DBEs were less competitive as a result of not being permitted to drop-ship. Happily, MnDOT has now removed this prohibition, and DBE suppliers will now be permitted to drop-ship.
This is a brief overview of the new Special Provision; it cannot replace actual review of the Special Provision, which is highly recommended. Additionally, the DBE program is still mainly controlled by the federal DBE regulations contained in 49 C.F.R. Part 26. As the MnDOT Civil Rights Office has recently ramped up attempts to meet or exceed the DBE goals, it is advisable for every contractor bidding federally-funded projects to have a strong grasp of these regulations prior to bidding.
Need more information? Our attorneys will soon be giving presentations on the new Special Provision and the DBE program generally. Please see the announcements below for times and places.
This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T