BILL ANALYSIS Ó AB 1565 Page 1 Date of Hearing: April 18, 2012 ASSEMBLY COMMITTEE ON EDUCATION Julia Brownley, Chair AB 1565 (Fuentes) - As Amended: January 30, 2012 ÝNote: This bill was doubled referred to and heard by the Assembly Business, Professions and Consumer Protection Committee as it relates to issues under its jurisdiction.] SUBJECT : Public contracts: school districts: bidding requirements SUMMARY : Requires school districts to use or cover the issues contained in the questionnaire developed by the Department of Industrial Relations (DIR) for prequalifying and rating prospective bidders for a public works project contract. Specifically, this bill : 1)Requires, until January 1, 2018, the questionnaire and the uniform system of rating bidders to cover, at a minimum, the issues covered by the standardized questionnaire and model guidelines for rating bidders developed by the DIR. 2)Specifies that nothing shall preclude a governing board from prequalifying or disqualifying a subcontractor. Specifies that the disqualification of a subcontractor by the governing board does not disqualify an otherwise prequalified contractor. 3)Requires the following for districts receiving state bond funds through the Leroy F. Greene School Facility Program (SFP): a) For contracts awarded on or after January 1, 2013 until January 1, 2018, if the governing board of a school district does not utilize a district-established process for prequalification utilizing a questionnaire and rating process, the governing board is required to use the procedures for qualification of bidders established by the Local Agency Public Construction Act. b) Specifies that for the purposes of this bill, bidders shall include all subcontractors performing work in excess of 3 percent of the total cost. AB 1565 Page 2 4)Requires, on or before January 1, 2017, the DIR to submit a report to the Legislature evaluating whether, during the years the provisions of this bill applied to contracts, violations of the Labor Code on school district projects have decreased as compared to the same number of years immediately preceding the enactment of this bill, and recommend improvements to the system for prequalifying contracts and subcontractors on school district projects. 5)Specifies that the provisions in this bill shall not apply to a school district with an average daily attendance (ADA) of less than 2,500. EXISTING LAW : 1)Requires the governing board of a school district to competitively bid and award to the lowest bidder contracts involving the following: a) An expenditure of $50,000 or more for the purchase of equipment, materials, or supplies, services (except for construction services), and repairs. b) An expenditure of $15,000 or more for a public contract project defined as construction, reconstruction, erection, alteration, renovation, improvement, demolition, repair, painting or repainting of any publicly owned, leased, or operated facility. (Public Contract Code (PCC) Sections 20111 and 22002) 2)Authorizes the governing board of a school district to require each prospective bidder for a contract to participate in a prequalification process that includes the submission of a standardized questionnaire and financial statement in a form established by the district, including a complete statement of the prospective bidder's financial ability and experience in performing public works. (PCC 20111) 3)Establishes the Local Agency Public Construction Act, which authorizes a public entity to establish a prequalification process and requires the DIR, in collaboration with affected agencies and interested parties, to develop model guidelines for rating bidders, and drafting a standardized questionnaire that may be used by public entities. (PCC 20100 et seq.) AB 1565 Page 3 4)Establishes the Leroy F. Greene School Facilities Act of 1998 and requires the State Allocation Board (SAB) to allocate to applicant school districts prescribed per-unhoused-pupil state funding for construction and modernization of school facilities, including hardship funding, and supplemental funding for site development and acquisition. (Education Code (EC) 17070.35) FISCAL EFFECT : According to the Assembly Appropriations Committee of an identical bill in 2011: 1)Unknown, but significant ongoing state-reimbursable General Fund (Prop 98) costs to school districts related to establishing and administering the prequalification process-likely as an additional contract cost for construction management consultants. 2)To the extent this process eliminates unqualified contractors who would otherwise be the winning bidder, districts might avoid certain costs associated with an underperforming contractor, such as time delays or inferior construction, and any associated legal costs. 3)The DIR will incur minor one-time costs ($75,000 or less) to determine any impact of the prequalification process on Labor Code violations and to make any recommendations for improving the process. COMMENTS : Background . Under the Local Agency Public Construction Act, enacted by AB 574 (Hertzberg), Chapter 972, Statutes of 1999, public agencies are authorized, but not required, to establish a process whereby prospective bidders are evaluated and prequalified to bid on public works projects. Public agencies can establish a prequalification procedure for single projects or for any projects that may be put out to bid over the next year. The prequalification process entails the completion of a questionnaire and submission of financial statements that are verified under oath by the bidder. Public agencies are required to adopt a uniform rating system to determine the minimum requirements permitted for qualification to bid and the type and size of contracts for which each bidder is eligible to bid and maintain an appeals process to allow prospective bidders to dispute their proposed prequalification rating. AB 1565 Page 4 AB 574 directed the DIR to develop a questionnaire and a uniform rating system that can be used by public agencies. DIR also established a rating system that includes recommended scores for questions that are scorable. The Local Agency Public Construction Act does not apply to school districts. School districts are required to competitively bid any public works contract over $15,000 and award the contract to the lowest responsible bidder. School districts are also authorized, but not required, to establish a prequalification process under a separate PCC Section that is similar to the Local Agency Public Construction Act. PCC Section 20111.5 authorizes school districts to establish its own questionnaire and rating system that includes a statement of the prospective bidder's financial ability and experience in performing public works. The questionnaire and financial statement are required to be verified under oath by the bidder. It is not known how many districts have established a prequalification process. Larger school districts in the state that have greater school construction needs are more likely to have prequalification requirements as there are administrative costs to establish the prequalification and appeals processes. The Los Angeles Unified School District, West Contra Costa Unified School District, and Irvine Unified School District are examples of districts that use prequalification processes. This bill requires, for a period of five years, school districts that choose to implement a prequalification process to adopt a questionnaire and rating system that covers, at a minimum, the issues covered by the DIR questionnaire and rating scale. The bill also requires governing boards that receive state education bond funds through the SFP to implement the DIR prequalification process, including subcontractors, if it does not implement its own prequalification system. School districts that do not receive state bond funds would continue to have the option of not implementing a prequalification process. Small school districts with less than 2,500 ADA are exempted from the requirements of this bill. What is the problem? The author states, "Since state law requires the use of the lowest bidder, many unqualified contractors are being awarded school construction projects with little or no experience and who lack the financial fortitude to accomplish a project on time and on budget. Under current law, AB 1565 Page 5 the selected contractors may file a significant amount of change orders that increases the cost of the project. In many instances this also leads to cutting corners that produce defects, prevailing wage violations and unsafe working conditions for workers." Benefits of Prequalification . Under a system where a school district must accept the lowest responsible bidder for any public works contract over $15,000, a prequalification process is beneficial. The DIR questionnaire requires contractors to provide detailed information regarding the company and its financial status, including whether the company has been in bankruptcy or involved in a civil lawsuit, licensing information, prior contracting experience (whether the contractor has completed other public works projects), whether the contractor has been involved or been found to have violated any federal, state or local laws, and whether the contractor has violated any labor and health and safety laws, including prevailing wage. A rating system enables a local agency to exclude bids from companies that do not meet minimum points. A local agency can predetermine the size of projects a company that meets the minimum of points may be allowed to bid on. Prequalification may be conducted annually, quarterly or by project by project basis. While there is no guarantee that a company that meets minimum points may not have financial problems or provide substandard work, this process reduces the risk of selecting a contractor with a low bid. A district that does not implement a prequalification process must either accept the lowest bid or not accept any bid and reopen the bidding process, which may cause project delay. Why require only school districts to implement prequalification process ? Under current law, no local agencies are required to use a prequalification process. This bill would require any school district with more than 2,500 ADA that receives state education bond funds to implement a prequalification process. The sponsor of the bill, the State Building and Construction Trades Council, states that because public works projects are plentiful due to bond dollars and with the variation in size and geographical locations, school projects provide a good basis to establish a pilot to evaluate the impact of mandatory prequalification. Supporters further argue that state bond dollars should be protected and used as efficiently as possible. A contractor AB 1565 Page 6 that goes bankrupt before completion of a project or completes a project with faulty construction will result in increased costs to complete the project or to redo the project and potential litigation to recoup funds a contractor had already received. The sponsor cites several examples over the last 12 years of faulty construction jobs leading to litigation or a district having to redo parts of a project. The California chapter of the national Electrical Contractors Association and the California Legislative Conference of the Plumbing, Heating and Piping Industry state, "With the recent downturn, many school districts have been receiving bids from contractors who have never performed school construction and in some cases; school districts receive bids from contractors who have never worked on a public works project in general?.Unqualified contractors are the cause of many problems on school construction projects." Opponents, including the Coalition for Adequate School Housing (C.A.S.H.), the California School Boards Association, a few school districts, County School Facilities Consortium, and the Association of California Construction Managers (ACCM), oppose the mandate created by this bill and argue that this bill will increase time and resources to establish a prequalification process and an appeals process. Opponents also argue that some contractors may not be willing to complete the questionnaire and as a result, there will be fewer bidders and less competition, resulting in higher bids. C.A.S.H. further argues that recent changes to state oversight of labor compliance on public works projects should help prevent labor violations. The ACCM states, "Because the pre-qualification provisions would apply to all projects, even those with costs just barely greater than $25,000, many project could have a pre-qualification requirement that is a significant part of the total project cost. Additionally, if a school district were to choose to use the Construction Management Multiple Prime (CMMP) project delivery process, the prequalification requirements could be significant and include up to one hundred previews of prequalification documents by each school district project." Low threshold . This bill applies to any public works project $15,000 or more. Should small projects such as painting several classrooms be required to be prequalified? A similar bill introduced in 2010, SB 258 (Oropeza), applied prequalification requirements on projects valued at $1 million or more. Staff AB 1565 Page 7 recommends increasing the project threshold to $1 million. Subcontractor requirement . The current prequalification process does not include subcontractors. This bill specifies that bidders include subcontractors performing work in excess of 3 percent of the total cost. If a prequalification process is done annually and not according to individual projects, the cost threshold for projects will not yet be available and subcontractors will not know if they need to prequalify. This problem is resolved if the bill is amended to apply to projects over $1 million. This bill is a reintroduction of a bill from last year, SB 600 (Rubio), which passed this Committee on a 6-3 vote and was held on the Assembly Appropriations Committee suspense file. Committee amendments . At the suggestion of this Committee, SB 600 was amended to a five-year pilot with implementation delayed for a year. Staff recommends moving all the dates in this bill back by one year. REGISTERED SUPPORT / OPPOSITION : Support California Labor Federation California chapter of the National Electrical Contractors Association California Legislative Conference of the Plumbing, Heating and Piping Industry Opposition Association of California Construction Managers (unless amended) Bonita Unified School District California School Boards Association Coalition for Adequate School Housing (unless amended) County School Facilities Consortium Cupertino Union School District Liberty Union High School District Orange County Department of Education Riverside County School Superintendents' Association Analysis Prepared by : Sophia Kwong Kim / ED. / (916) 319-2087 AB 1565 Page 8