BILL ANALYSIS Ó AB 1565 Page 1 Date of Hearing: May 2, 2012 ASSEMBLY COMMITTEE ON APPROPRIATIONS Felipe Fuentes, Chair AB 1565 (Fuentes) - As Amended: April 26, 2012 Policy Committee: Business and Professions Vote: 7-2 Education 8-1 Urgency: No State Mandated Local Program: Yes Reimbursable: Yes SUMMARY This bill requires large school districts to prequalify prospective bidders on certain school construction projects using a specified process. Specifically, this bill: 1)Requires all school districts with average daily attendance of 2,500 or more, for contracts on state-funded projects awarded on or after January 1, 2014, to prequalify prospective bidders, including subcontractors that would perform work equivalent to more than 3% of the project cost. 2)Requires a school district, when requiring contractors to prequalify on any public works project, to either use the standardized forms and procedures developed by the Department of Industrial Relations (DIR) pursuant to current law, or develop a prequalification questionnaire and a contractor rating system that, at a minimum, covers the issues addressed in the DIR forms. 3)Makes all of the above inoperative on January 1, 2019. 4)Requires the Director of Industrial Relations (DIR), by January 1, 2018, to report to the Legislature whether there was a decrease in Labor Code violations on school contracts during the time the bill's provisions were in effect and to recommend improvements to the prequalification process. FISCAL EFFECT 1)Unknown, but significant ongoing state-reimbursable General AB 1565 Page 2 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. (About one-third of school districts meet the enrollment threshold mandated under this bill.) Additional costs would be incurred to address appeals from contractors denied qualification. If this process added 0.1% to 0.5% to project costs, for every $500 million in state-funded school construction projects, state mandated costs would be $500,000 to $2.5 million. 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 1)Background . AB 574 (Hertzberg)/Chapter 972 of 1999 authorized certain public agencies to prequalify contractors wishing to bid on public works projects. AB 574 further required the DIR, in collaboration with affected agencies and interested parties, to develop a standardized questionnaire and model guidelines for rating bidders that public entities may use for prequalification. AB 574 applied to cities, counties, and special districts, but not to school districts, which already had statutory authority to prequalify contractors. Currently, no government entity of any type is required to prequalify contractors. 2)Purpose . According to the author and supporters, because state law requires public contracts to be awarded to the lowest bidder, many unqualified contractors, who lack adequate financial resources to accomplish a project on time and on budget, are bidding on school construction projects. This can result in a significant number of change orders and/or cutting corners that produce defects, prevailing wage violations and unsafe working conditions for workers. AB 1565 Page 3 The author asserts that "This bill will help ensure quality construction of California schools at the lowest price by requiring that school districts pre-qualify their contractors on large construction projects. This will allow schools to continue to utilize the lowest responsible bidder contracting method which protects tax dollars, while ensuring that the bidding pool is made up of competent and qualified contractors." This bill is sponsored by the State Building and Construction Trades Council of California and supported by other labor organizations and contractor organizations. 3)Another School Mandate ? The state currently owes school districts about $3.4 billion in deferred mandate payments. Moreover, annual state costs for district mandates total about $200 million. Given these significant costs, and the state's ongoing budget challenges, is this an appropriate time to enact another state reimbursable mandate on school districts? 4)Opposition . The Coalition of Adequate School Housing (C.A.S.H.) opposes this new mandate on schools, as do the California School Boards Association, and the Association of California Construction Managers. These entities contend local school boards should have the discretion to decide whether prequalification is necessary and within their best interests. 5)Prior Legislation . This bill is identical to SB 600 (Rubio) of 2011 and substantially similar to SB 258 (Oropeza) of 2010, both of which were held on this committee's Suspense File. SB 258 applied to all school districts on projects exceeding $1 million, regardless of fund source. Analysis Prepared by : Chuck Nicol / APPR. / (916) 319-2081