BILL ANALYSIS SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: SB 1341 SENATOR ALAN LOWENTHAL, CHAIRMAN AUTHOR: price VERSION: 2/19/10 Analysis by: Art Bauer FISCAL: No Hearing date: May 4, 2010 SUBJECT: Los Angeles County Metropolitan Transportation Authority (METRO) contracting practices DESCRIPTION: This bill relates to preferences in contracting for small business enterprises at METRO. ANALYSIS: In 1996, California voters approved Proposition 209, which amended the California Constitution to preclude granting preferences on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education, or public contracting. The provision does not apply to federal contracting requirements. In response to Proposition 209, METRO adopted a local ordinance that provides a preference to small businesses and is not inconsistent with the provisions of Proposition 209. This bill endeavors to codify the small business preference requirements. Existing law governing METRO procurement: 1) Requires that construction contracts in excess of $25,000 be awarded to the lowest responsible bidder. 2) Requires that contracts involving the purchase of supplies, equipment, and materials in excess of $100,000 be awarded to the lowest responsible bidder or to the bidder that provides "best value" to METRO. To award contracts on the basis of best value METRO must include in the solicitation for a bid the evaluation criteria that will be SB 1341 (PRICE) PageB used to determine best value. 3) Defines value as the "overall combination of quality, price, and other elements of a proposal that, when considered together, provide the greatest overall benefit in response to requirements described in the solicitation documents." This bill : 1) Adds to existing law the requirement that successful bids for construction contracts and bids for supplies, equipment, and materials must be "responsive" to the terms of the bid solicitation documents as well as low cost. This condition is also added to best value procurements. 2) Authorizes METRO to grant a small business preference on contracts with a value in excess of $100,000 for design-build services, the procurement of goods, or the delivery of services a five percent bidding preference to the lowest responsive and responsible bidder or best value proposer, if the firm is a small businesses and a prime contractor. 3) Establishes for the lowest responsive and responsible bidder or best value proposer a subcontracting participation goal for small businesses of five percent on contracts with a value in excess of $100,000 and financed with nonfederal funds. 4) Requires bidders and proposers to make a good faith effort to secure the services of small business enterprises and establishes procedures to demonstrate a good faith effort, including requiring attendance at pre-bid conferences, identification of services and skills available to small business subcontractors, advertising for services and in trade publications, assisting potential subcontractors in obtaining bonds and insurance, and other related conditions. 5) Defines a small business enterprise as meeting the definitions of the Small Business Administration appropriate to the type of work. 6) Authorizes METRO to deny small business enterprise eligibility to any concern that has average annual gross SB 1341 (PRICE) PageC receipts greater than $22 million over the previous three fiscal years, or to an individual with a net worth, excluding their residence, that exceeds $1 million. METRO is authorized to adjust these amounts to inflation. COMMENTS: 1) Purpose . The purpose of this bill is to create a process to establish a small business participation goal of five percent for construction projects, services, and the acquisition of supplies funded with local, state, or other nonfederal sources of revenue. Under the terms of the California Constitution business participation goals associated with public contracting cannot be race or gender based. This bill meets that test. 2) Architectural and Engineering (A&E) services are not covered by this bill . A&E firms are not covered by this bill. The procurement of A&E are governed by Proposition 35-Public Works Projects and the Use of Private Contractors for Architectural and Engineering Services which amended the California Constitution to permit all public agencies in the state to contract with qualified architectural and engineering firms for professional services on all public works projects. Proposition 35 defined in statue architectural and engineering services to include architectural, landscape architectural, environmental, engineering, land surveying, and construction management services. In this regard, the bill includes among the category of services subject to the five percent preference design-build services. Design-build is a procurement process that involves the selection of a team based on a combination of best value and cost that consists of A&E firms and construction firms. For purposes of clarification, the committee may wish to amend the bill on page 3, line 35 to strike "design-build" and insert "for the construction component of a design-build team." This would ensure that there would be no confusion about the role of A&E firms when forming a design-build team. 3) Application of the preference . The manner for applying the preference is that METRO would reduce by five percent bids for construction or supplies and the cost proposal for services. It is conceivable that a small business pursuing SB 1341 (PRICE) PageD a contract as a prime contractor could receive a ten percent preference if the firm used other small businesses as subcontractors. 4) Definition of small business enterprise may include inconsistencies . The bill provides that a small business designation shall be denied to any business that has average annual gross receipts greater than $22 million over the previous three fiscal years. In addition, the bill cites the Small Business Administration (SBA) rules governing the definition of a small business enterprise. The SBA designation is not based on a fixed dollar amount. The SBA summarizes its methodology for determining whether a business may be classified as small as follows: A size standard is the largest that a concern can be and still qualify as a small business for the Federal Government programs. For the most part, size standards are the average annual receipts or the average employment of a firm.<1> The SBA does not rely upon a fix dollar amount to determine whether a business is classified as small . Under the SBA guidelines, a graphic design firm with more than $7 million of gross receipts is not considered a small business. Under this bill a graphic design firm making up to $22 million is a small business. Another example of how this bill appears to exclude an enterprise defined by the SBA as a small business is found in the construction industry. The SBA guidelines define a firm that constructs highways, streets, and bridges with gross receipts of less than $33.5 million as a small business. Because of the $22 million cap on the gross receipts of a firm to be considered this type of firm would not be considered small. In a conversation with METRO staff, they were unable to explain the inconsistency between using SBA guidelines to classify a business as small and the $22 million cap. The committee may wish to consider resolving this inconsistency. POSITIONS: (Communicated to the Committee before noon on --------------------------- <1> U. S. Small Business Administration Table of Small Business Size Standards Marched to the North American Industry Classification System Codes , August 22, 2008. SB 1341 (PRICE) PageE Wednesday, April 28, 2010) SUPPORT: Los Angeles County Chapter of the American Council of Engineering Companies of California ACE Fence Company AGS Architects Aviva Spectrum CK Management Integrated Engineering Management Langford and Carmichael Lenax Construction Services PJS&P Associates R-T Welding and Fabrication Selbert Perkins Design Ultra Systems Wincal Technology Several additional letters were received. OPPOSED: None received.