Memorandum
Subject: INFORMATION: Lease or Use of
Prime Contractor's Equipment by Disadvantaged
Business Enterprise (DBE)
Firms |
Date: June 28, 2005 |
From: /S/ original signed by
Frederick D. Isler, Associate Administrator
for Civil Rights |
In Reply Refer to: HCR |
To: Mr. Roberto Martinez-Fonseca, Division Administrator (HDA-VA)
Richmond, Virginia |
Your office has requested guidance to respond to the Virginia Department of
Transportation (VDOT) regarding the use or lease of a prime contractor's crane
by DBEs and crediting towards a DBE contract goal. While this response does
not address VDOT's particular situation, it serves as general guidance on the
issue of DBEs using or leasing a prime contractor's equipment. There are two
matters to consider when this issue arises:
- Is the DBE performing a commercially useful function (CUF) for which it
can received credit? and
- Does this raise questions about the firm's eligibility for certification
based on the requirement that the DBE owners control the enterprise? It is
important to note that failure to perform a CUF cannot be considered in making
eligibility determinations unless there is a pattern of conduct that indicates
the DBE is attempting to evade or subvert DBE program requirements.
As you are aware, the DBE regulations specifically address the leasing of
a prime contractor's equipment and crediting it toward the DBE goal. Therefore,
this response primarily covers the leasing of equipment as contained in the
existing regulations. However, based upon the principle of DBEs being independent
businesses (an element of control) that are able to perform on Federal-aid
highway contracts with their own resources, (labor, equipment, supplies, etc,),
we see no substantive difference in DBEs "using" a prime contractor's
equipment. That practice may compromise the independence and control of the
DBE (49 CFR 26.71(m)).
During the promulgation of the existing regulation, the USDOT considered several
comments from prime contractors on the issue of crediting the lease of equipment
and supplies from prime contractors toward DBE goals. In the February 2, 1999,
Federal Register preamble, USDOT stated that the situation was too problematic
from an "independence and commercially useful function view . . . ." Therefore,
49 CFR 26.55(a)(1) does not allow supplies purchased or equipment leased from
a prime contractor to count toward the DBE goal.
Independence
The DBE firm, in order to be certified must be an independent business. Under
26.71(b)(1), it states, "In determining whether a DBE is an independent
business, you must scrutinize relationships with non-DBE firms, in such areas
as personnel, facilities, equipment, financial and/or bonding support, and
other resources." Moreover, 49 CFR 26.71(m) allows a DBE to lease equipment
necessary to perform its work where leasing of equipment is normal industry
practice and the lease does not involve a relationship with a prime contractor
or other party that compromises the independence of the DBE firm. Moreover,
26.71(n) requires that DOT recipients grant certification to a firm only for
the specific types of work in which the firm has the ability to control. In
determining the ability of the DBE to control a firm you must consider whether
the firm owns/lease equipment necessary to perform its work. The language of
the regulations has the direct meaning that in order to be eligible to enter
the program the firm must have the necessary resources independent of others
to perform the work it might be awarded. Therefore, the practice of a DBE using
a prime's equipment to perform a critical aspect of its contract should not
be condoned because it compromises the independence of the firm.
Commercially Useful Function (CUF)
The basic premise behind CUF is that DBE's perform their contract with their
own resources, independently of the prime contractor. To perform a CUF, the
DBE must carry out its responsibilities by actually performing, managing, and
supervising the work involved. Furthermore, 49 CFR 26.55(c )(1) states that, ".
. . .the DBE must also be responsible, with respect to materials and supplies
used on the contract, for negotiating price, determining quality and quantity,
ordering the materials, and installing (where applicable) and paying for the
materials itself" (emphasis added). To credit DBE participation for materials
and supplies, installation is usually a key aspect of the contract. For example,
suppose a major part of the credit toward the DBE goal is the cost of the material
(such as steel, pipe, etc.). The value of the equipment lease is minimal for
crediting toward the DBE goal. However, where installation is required, the
use or lease of equipment is a critical element of the DBE's ability to perform
its contract. Therefore, when DBEs are awarded subcontracts that require equipment,
they must make the necessary arrangements so that they are not dependent on
the prime contractor to perform critical aspects of their subcontract. The
intent is not to focus on how the equipment was obtained to perform the work.
From a CUF perspective, the fundamental point is that the equipment that is
being relied upon by the DBE came from the prime contractor.
The FHWA adheres to that principle as indicated under 26.55 specifically disallowing
DBE credit for leasing of equipment from the prime. Therefore, if the DBE uses
or leases equipment from the prime contractor, the prime contractor and the
DBE cannot claim credit for the value of that equipment, notwithstanding standard
industry practices.
This memorandum is being shared with all Division Administrators as guidance
on using or leasing of equipment by DBEs from prime contractors. This guidance
has been coordinated with the FHWA Office of Chief Counsel. Should you have
any questions or comments, please do not hesitate to contact Martha Kenley at
(202) 366-8110.
cc: Division Administrators