Bass, Berry & Sims attorney Richard Arnholt outlined the requirements that government contractors must observe when using Disadvantaged Business Enterprises (DBEs). A DBE is categorized as “for-profit businesses which are at least 51% owned and controlled by socially and economically disadvantaged individuals.” The Infrastructure Investment and Jobs Act (IIJA) emphasizes the use of DBEs when awarding contracts and requires that prime contractors commit a certain amount of the award to DBEs that perform a “commercially useful function.” While not explicitly defined, “there is a presumption that the DBE is not performing a ‘commercially useful function’ when it performs less than 30% of the contract’s total cost with its workforce.”
A recent case involving alleged False Claims Act violations against Sherwin Williams and its use of a DBE as a mere pass-through business demonstrates the need for clarification of the “commercially useful function” term in government contracts awards. Proposed changes to the rule include the following:
- Eliminates the current bar on drop shipping allowing DBEs to receive credit for 40% of the cost of materials.
- Caps the total credit a DBE can receive from prime contractor expenditures at 50%, decreasing the limit from 60% of expenditures from non-manufacturer suppliers.
- Defines a DBE as a manufacturer when “it owns or leases and operates a factory or establishment that produces the materials, supplies, articles, or equipment required under the contract.”
The full article, “Government Contract Requirements on Disadvantaged Business Enterprises,” was published by Reuters on March 23 and is available online or in the PDF provided by the outlet. For more information on this topic, read the post on the firm’s GovCon & Trade blog, “Proposed Rule for DBE Program Comes as Infrastructure Money Begins to Flow.”