BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 1565
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          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.  








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          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.)








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          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.  








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          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, 








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          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 








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          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 








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          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 









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