Requirements for Contracts with DBE Goals (Prime Contractor)

The Disadvantaged Business Enterprise (DBE) Program exists to create a level playing field on which DBEs can compete fairly for transportation contracts. The Program requires ADOT to set DBE contract goals if it determines that it cannot meet its overall goal for DBE participation in other ways.

It is the responsibility of the Prime to meet any DBE goals agreed to in the contract. If you need to either reduce the scope of work for a DBE, or terminate that DBE entirely, this does not in any way change your responsibility to meet the DBE goal. Credit towards the DBE goal is only given after the DBE has been paid for the work performed.

ADOT encourages prime contractors to secure DBE firms beyond meeting the DBE goal. This is good for two reasons.  First, it helps if circumstances occur during work on the project that result in loss of work for a DBE committed to meet the contract goal.  If the contractor has employed more DBEs than needed to meet the DBE goal, that contractor is still likely to meet the DBE goal with the remaining DBEs if for some reason the dollar value of the work of one DBE firm is reduced.  The second reason is that using more DBEs than needed to meet the DBE goal helps ADOT to meet or exceed the race and gender-neutral portion of this annual DBE goal, as well as its overall annual goal.  If ADOT is able to consistently meet or exceed its annual goal, DBE contract goals may not be necessary in the future.      

When counting DBE participation, the DBE must be certified in the category of work it performs in order for that work to count towards DBE participation. Further, only the value of work actually performed by the DBE counts toward DBE participation, and it is only counted after the work has been paid for. Certain special rules apply for suppliers and for trucking firms.

ADOT will monitor the contractor’s utilization of DBE firms listed at time of bid to ensure that the contractor's commitments to DBE firms and the DBE goals are met at the end of the contract.  Contractors should immediately notify the Resident Engineer and the ADOT Business Engagement & Compliance Office if circumstances change that may affect commitments made to DBE firms working on the contract.  The contractor can be sanctioned monetarily at the end of the contract for not meeting the DBE goal on the contract.

The Associated General Contractors of America have produced a helpful guide to working with DBEs as a Prime, called the Disadvantaged Business Enterprise (DBE) Contractors’ Tool Kit. You can find it on the AGC website.

If ADOT determines that the contractor has, without justification, not met the established DBE goal, ADOT will, at its discretion, deduct up to two times the amount of the unattained portion of the established DBE goal from monies due or becoming due the contractor as liquidated damages, based on the circumstances of the noncompliance.  

It is important to note that DBE involvement only satisfies DBE goals if the DBE serves a commercially useful function. Generally, this means that the DBE must perform the whole of a task itself and the task must be necessary for the completion of the project. The specific rules vary by the task being performed, however. 

A DBE will not be considered to perform a commercially useful function if it acts only as an extra participant in a transaction or projects to provide the appearance of DBE participation. If a DBE does not perform or exercise responsibility for at least 30 percent of the total cost of its contract with its own work force, or if the DBE subcontracts a greater portion of the work of a contract than would be expected on the basis of normal industry practice for the type of work involved, ADOT will presume that the DBE is not performing a commercially useful function.

For a DBE trucking company to be deemed to be performing a commercially useful function, the DBE must manage and supervise the entire trucking operation for which it is responsible on a particular contract. Further, the DBE must itself own and operate at least one truck, and it must use that truck each day on which it is earning credit toward the DBE goal.

When a DBE is presumed not to be performing a commercially useful function as provided above, the DBE may present evidence to rebut this presumption. Decisions on commercially useful function matters are subject to review by FHWA, but are not administratively appealable to U.S. DOT.

ADOT BECO staff and/or Construction Inspectors will visit construction work sites to conduct Commercially Useful Function reviews to ensure that this requirement is being met.  Contractors and DBE firms must cooperate and participate in interviews by ADOT staff that will make every effort not to disrupt workflow on the project.  

Information or questions asked in interviews is available from BECO.

See this video from the FHWA for more information on what qualifies as a Commercially Useful Function. 

For more information on good faith efforts, as well as information on what sort of work satisfies the commercially useful function requirement of DBE goals, see the Commercially Useful Function Checklist in the BECO section of the ADOT website.

In some cases, not all of the money paid to a DBE can count toward the DBE goal. In trucking for instance, if the DBE leases additional trucks (including operators) from another DBE, the total value of the transportation services counts toward the DBE goal. However, if the DBE leases additional trucks (including operators) from a non-DBE, credit towards the DBE goal is earned by the additional trucks only up to an equivalent amount to that earned by the DBE-owned trucks. For additional trucks leased from non-DBE companies, only the fee or commission paid to the DBE as a result of the lease agreement is counted toward the DBE goal.

For example, if Firm X (a DBE) owns and operates two trucks and leases three trucks from Firm Y (a non-DBE), then the costs for the trucks from Firm X and two trucks from Firm Y would count toward the DBE goal. For the additional truck from Firm Y, only the commission paid to the DBE as a result of the lease agreement would count toward the DBE goal.

For suppliers, 100 percent of the cost of materials and supplies is credited toward the DBE goal if they are obtained from a DBE manufacturer. However, if the materials are purchased from a DBE regular dealer (essentially an firm which regularly buys, stores, and sells supplies but does not manufacture them), only 60 percent of the cost of materials and supplies is credited. The cost of materials purchased from a DBE that is neither a manufacturer nor a regular dealer does not count toward the DBE goal, although the fees and commissions charged by the DBE to procure and supply those materials do count.

DBE credit for supplying paving grade asphalt and other asphalt products will only be permitted for standard industry hauling costs, and only if the DBE is owner or lessee of the equipment and trucks. Leases for trucks must be long term (extending for a fixed time period and not related to time for contract performance) and must include all attendant responsibilities such as insurance, titling, hazardous waste requirements, and payment of drivers.

In general, the entire amount of a contract that is performed by the DBE’s own forces, including the cost of supplies and materials purchased by the DBE for the work on the contract and equipment leased by the DBE will be credited toward DBE participation. However, supplies and equipment the DBE subcontractor purchases or leases from the prime contractor or an affiliate of the prime contractor will not be counted toward DBE participation.

A DBE subcontractor may enter into second-tier subcontracts that are consistent with normal industry practices. However, items that are second-tier subcontracted by a certified DBE subcontractor will not be counted toward the participation goal unless the work is subcontracted to another certified DBE or no more than 30 percent of the DBE subcontract is second-tier subcontracted to a non-DBE.

If a DBE is deemed ineligible (decertified) or suspended by the department, the DBE may not be considered to meet a contract goal on a new contract, but may be considered to meet the contract goal under a subcontract that was executed before the DBE suspension or decertification is effective.

When a committed DBE firm or a DBE prime contractor loses its DBE eligibility and a subcontract or contract has not been executed before a decertification notice is issued to the DBE firm by its certifying agency, the ineligible firm does not count toward the contract goal. In this case, the contractor must meet the contract goal with an eligible DBE firm or firms or demonstrate good faith effort. However, when a subcontract is executed with the DBE firm before the Department notified the firm of its ineligibility, the contractor may continue to use the firm on the contract and may continue to receive credit toward the DBE goal for the firm’s work.

A prime must make all reasonable efforts to avoid substituting or terminating a DBE that is listed on the DBE Intended Participation Affidavit Summary. At minimum, you must show that you negotiated in good faith, gave timely notices, and were willing to extend deadlines to the extent possible without jeopardizing the overall project.

Any attempt to substitute one DBE for another or to terminate any DBE subcontractor must be approved by BECO, and the reasons for doing so must be explained. If the change would reduce DBE participation below the DBE goal, the change must be justified. Good cause for substitution or termination generally includes situations where the listed DBE

• fails or refuses to execute a written contract.
• fails or refuses to perform the work of its subcontract in a way consistent with normal industry practice standards.
• fails or refuses to meet the prime contractor’s reasonable, nondiscriminatory bond/insurance requirements.
• becomes bankrupt, insolvent, or exhibits credit unworthiness.
• is ineligible to work on public works projects because of suspension and debarment proceedings pursuant to federal or state law.
• is not a responsible contractor.
• voluntarily withdraws from the project and provides written notice of its withdrawal to the Department.
• is ineligible to receive DBE credit for the type of work required.
• a DBE owner dies or becomes disabled with the result that the firm is unable to complete its work on the contract.
• other documented good cause that the Department determines compels the termination or substitution of the DBE subcontractor.

The DBE Substitution/Termination Form of a DBE can generally be found in the BECO section of the ADOT website. Be sure to follow al requirements for substituting/terminating DBEs listed to meet a contract goal outlined in the DBE EPRISE Contract Specifications.  Failure to follow procedures and secure ADOT approval before substituting/terminating a DBE committed to meet a contract goal is a material breach of contract and ADOT will deduct the dollar amount of the wrongfully substituted/replaced DBE subcontract plus 25 percent of the amount remaining to be paid to the DBE as liquidated damages.

If the termination of the DBE is approved, the contractor is still obligated to meet agreed-upon DBE goals and must make good faith efforts to find a DBE substitute for the terminated DBE.