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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:

  1. Is the DBE performing a commercially useful function (CUF) for which it can received credit? and
  2. 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

Page last modified on May 18, 2012.
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