DBE Program Regulations: Size standard

DOT has released Official FAQs on DBE Program Regulations. These questions and answers provide guidance and information for compliance with the provisions under 49 CFR part 26. Like all guidance material, these questions and answers are not, in themselves, legally binding or mandatory, and do not constitute regulations.

If a firm has exceeded the size standard for the most specific available NAICS code for the type of work it does, is it appropriate for the firm to continue working in that type of work in a broader NAICS code? Section 26.71(n)

• Generally not. Section 26.71(n)(1) provides that the types of work a firm can perform as a DBE “must be described in terms of the most specific available NAICS code for that type of work.” Suppose a firm’s work is in Specialty Subcontracting Field X. The most specific available NAICS code is one that describes only Field X and does not include other types of work. That is the only NAICS code that should be assigned to the firm.
• If the firm exceeds the size standard for the specific NAICS code relating to Field X, then it is no longer eligible to work as a DBE. If there is a broader NAICS code that includes not only Field X, but also Fields A, B, C, and D, and which has a higher size standard, the firm should not be assigned that broader code.
• The only exception to this principle would be in a situation where the firm actually performs all or some of the types of work in Fields A, B, C, and D and demonstrates to the certifying entity that the disadvantaged owners can control the activities of the firm in those areas.

How do recipients determine the size of a firm that performs different types of work? Section 26.65(a)

• In the DBE program, a firm may perform more than one type of work. For example, it may work as a general contractor on one project and a specialty subcontractor on another. For another example, a firm may perform one contract as an architect/engineer and another as an electrical subcontractor. The Department’s DBE rule provides that, as a recipient, you must apply current SBA size standards “appropriate to the type(s) of work the firm seeks to perform in DOT-assisted contracts” (?26.65(a)). Suppose the size of Firm X (e.g., determined through looking at the firm’s gross receipts) is $5 million, and X is seeking certification as a DBE in classification codes yyyy and zzzz. The SBA small business size standards for these classifications are $3.5 and $7 million, respectively. Firm X would be a small business that could be certified as a DBE, and that could receive DBE credit toward goals, in code zzzz but not in code yyyy.
• Likewise, suppose that the SBA size standard for a specialty subcontractor in a particular field is $4 million. Firm Y sometimes performs work in that field, but other times acts as a general contractor. The SBA size standard for general contractors is in excess of the Department’s $17.42 million dollar statutory size cap. Firm Y’s gross annual receipts are $10 million. Firm Y can be certified as a DBE and receive DBE credit toward goals in its capacity as a general contractor. It cannot be certified as a DBE, and cannot receive DBE credit toward goals, in its capacity as a specialty contractor.
• It is important for recipients to make these distinctions. It is not appropriate for a recipient to decline to certify a firm for all purposes when the firm meets SBA size standards with respect to some of its activities. However, recipients must be careful to award DBE credit to a firm only in those areas in which it does meet size standards.

After a firm loses eligibility for exceeding size limits, or an individual’s presumption of social and economic disadvantage is rebutted for exceeding the personal net worth cap, can the individual or business ever participate in the DBE program in the future? Section 26.65; 26.67(b);26.85(b)

• When a firm is denied certification, the recipient must establish a waiting period of 12 months or less for reapplication. Once this waiting period has expired, the firm can reapply for certification.
• This provision applies regardless of the basis for the denial of certification. A denial based on business size or personal net worth grounds is no different, for this purpose, from a denial based on ownership or control grounds.
• For example, suppose a firm is denied certification in Year 1 because it exceeds the business size standard, or because its owner has a personal net worth that exceeds $1,320,000. In Year 2, after the recipient’s reapplication waiting period expires, the firm applies for certification again. If the size of the business in Year 2 is under the applicable standard, or the personal net worth of the owner has fallen below $1,320,000, respectively, then the recipient would certify the firm, assuming it met all other certification requirements.

What information may a UCP appropriately consider in determining whether a firm meets small business size standards based on gross receipts? Section 26.5, 26.65

• Part 26 refers to Small Business Administration (SBA) regulations (13 CFR Part 121) for the definitions of what constitutes a small business for purposes of the DBE program.
• Many of the SBA business size standards, as well as the statutory cap on participation in the DBE program, are defined in terms of the gross receipts of businesses. If a firm’s gross receipts, averaged over three years, exceed a certain amount, the firm is ineligible to participate as a DBE.
• The basic SBA definition of “receipts, ” in 13 CFR §121.104(c), is “total income” (“gross income” in the case of a single proprietorship) of the business, “as these terms are defined or reported on Internal Revenue Service (IRS) Federal tax return forms,” such as Form 1120 for corporations.
• For this reason, the first resource to which recipients should refer in determining a firm’s receipts is the firm’s tax returns.
• The most recent SBA interpretation of §121.104 makes clear that it is appropriate to consider evidence beyond a firm’s tax returns, when the other information provides a reason to believe that the tax return information is false. “False,” in this context, is not limited to meaning fraudulent, provided with actual knowledge that it is incorrect, or provided with reckless indifference to the actual facts. If the information from the tax returns is false in the commonly understood sense of the word (i.e., incorrect, erroneous, not corresponding to reality), then it is appropriate to use other information to construct a more accurate picture of the firm’s receipts.
• DOT’s position on all certification matters is that UCPs should focus on the substance and reality of a firm’s circumstances, not merely on the form of its arrangements or what is shown on paper (cf.§26.69(c)).
• Consequently, if information available to the recipient (e.g., from a company’s books, from financial records provided by other recipients) shows that the picture of a firm’s receipts painted by a tax return does not correspond to the firm’s financial reality, or is misleading (even without any intent to deceive on the firm’s part), the recipient is entitled to consider this information in making a size determination.
• The fact that information extrinsic to the firm’s tax returns may be considered does not mean that this information necessarily has controlling significance. As in all certification matters, the UCP must take into account all the evidence and all of the firm’s circumstances, weigh the credibility of the information, and make an informed, balanced judgment concerning whether a firm meets the rule’s small business size criteria.