Disadvantaged Business Enterprises: Potential Opportunities or Disasters

James R. Wakefield, P.C.'s Construction Litigation Legal Blogs

Licensed for 36 years

Attorney in Newport Beach, CA

James R. Wakefield, P.C.

Free initial consultation, Credit cards accepted, Fixed hourly rates

Serving Newport Beach, CA

  • Serving Newport Beach, CA

  • Free initial consultation, Credit cards accepted, Fixed hourly rates

Senior Partner at firm Cummins & White, LLP

Serving Newport Beach, CA

Free initial consultation, Credit cards accepted, Fixed hourly rates

Awards AV Preeminent

The certified “Disadvantaged Business Enterprise” (DBE) is an integral part of the construction industry in California and nationwide. Billions of dollars in construction funds are allocated solely to DBEs in California every year. The DBE program is a creation of the U.S. Department of Transportation (DOT) and other federal agencies. If DOT funds are used in a construction project, the department defines DBE parameters and requirements for DBE participation in contracts associated with the project.

More than 400 California counties, cities, and other public agencies receive DOT funds and other federal agency funds for their construction projects. As a condition of receiving these funds, the public entities are required to comply with the applicable federal goals for the use of DBEs. In theory, the DBE program should create a great deal of opportunity for disadvantaged small businesses. However, as we’ll discuss in future blogs, that is not necessarily true in practice. But before we get there, let’s focus on what a DBE is and how a business obtains DBE certification.

What is a Disadvantaged Business Enterprise?

Most construction industry professionals are familiar with the DBE term, and most people can tell you what they think a DBE is, but they are often wrong. For example, there is the Small Business Enterprise, which is a different certification altogether but is often mistaken for a DBE. Let’s clear the confusion about the DBE program.

Eligibility

The DOT defines a disadvantaged business enterprise as a for-profit small business that is at least “51 percent owned and controlled by socially and economically disadvantaged individual(s).” The disadvantaged individual, besides owning at least 51 percent interest in the firm, must control management and daily business operations of the company. (The U.S. Environmental Protection Agency has similar guidelines under the Clean Air Act and the Clean Water Act for its construction projects.)

Social Disadvantage

According to the DOT, “socially disadvantaged individuals are those who have been subjected to racial or ethnic prejudice or cultural bias within American society because of their identities as members of groups and without regard to their individual qualities.”

It is presumed that the following individuals are socially disadvantaged:

  • Women
  • Black Americans
  • Hispanic Americans
  • Native Americans
  • Asian-Pacific Americans
  • Subcontinent Asian Americans (i.e., Indian, Pakistani, Sri Lankan, and Bangladeshi)
  • And other minorities found to be disadvantaged by the U.S. Small Business Administration (SBA)
  • In California, disabled veterans also are included in the definition of DBE and California requires at least 3 percent disabled veteran participation in public construction projects. Individuals who do not fall into any of these categories may be determined to be socially disadvantaged on a case-by-case basis.

    Economic Disadvantage

    The DOT’s definition of economically disadvantaged is any owner who has a net worth of less than $1.32 million. That would potentially exclude a large number of contractors and suppliers because in most cases the equity in their businesses and homes alone would far exceed that amount.

    However, the rule announced by the DOT at 49 Code of Federal Regulations 26.67 provides that an agency certifying a DBE must exclude from its calculation the individual’s ownership interest in the applicant firm. The certifying agency also must exclude an individual’s equity in his or her primary residence, as well as the individual’s assets held in vested pension plans, IRAs, 401(k) plans, or other retirement savings accounts except for that amount that would be left over after taxes and penalties were paid if the account were to be immediately distributed. Therefore, an owner of a DBE could have a net worth of considerably more than $1.32 million and still be considered economically disadvantaged.

    Additional Requirements

    The DBE firm also must be a small business as defined by the SBA. The firm, including its affiliates, may not have annual gross revenue in excess of $23,980 million in the three previous years before applying for certification as a DBE. In addition, the owner cannot be controlled by an affiliate non-DBE company.

    How Does a Business Obtain DBE Certification?

    For the sake of brevity, I am inclined to point you to the California Unified Certification Program (CUCP) website, which provides more detailed information about obtaining DBE certification than I can provide in this blog.

    The CUCP provides a roster of certifying agencies, along with contact information. In Southern California, there are three certifying agencies:

  • Caltrans
  • City of Los Angeles
  • LA Metro
  • Small, minority, and women businesses seeking to participate in the DBE program need to contact the agencies to determine if the agencies will certify the business. Each agency restricts coverage to certain geographical areas because a physical inspection of the business is part of the certification process.

    If the contractor or material supplier is successful in obtaining its DBE certification through the CUCP, the contractor is registered in the CUCP directory (database), which is accessible to all businesses, contractors, and public entities throughout California. In theory, this listing provides the new DBE with exposure to potentially millions of dollars of contracts.

    Unfortunately that is not always the case. Although the purpose of the DBE statutes and regulations are to level the playing field for socially and economically disadvantaged businesses, it does not always work out that way. We will discuss those issues in future installments.

    If you have specific questions about your company and eligibility for DBE certification (or any other questions about the DBE program), please contact me at by email at JWakefield@cwlawyers.com or call me 949/852-1800.

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