BILL ANALYSIS                                                                                                                                                                                                    Ó






                          SENATE COMMITTEE ON EDUCATION
                              Alan Lowenthal, Chair
                            2011-2012 Regular Session
                                         

          BILL NO:       AB 1565
          AUTHOR:        Fuentes
          AMENDED:       June 21, 2012
          FISCAL COMM:   Yes            HEARING DATE:  June 27, 2012
          URGENCY:       No             CONSULTANT:Kathleen Chavira

           SUBJECT  :  School District Bidding Requirements.

          
           SUMMARY  

          This bill, beginning with contracts awarded on or after 
          January 1, 2014 and until January 1, 2019, requires a school 
          district to prequalify a prime contractor who provides a bid 
          and all electrical, mechanical and plumbing subcontractors 
          utlized, if it meets all the following conditions: 

             1)   Has an average daily attendance of 2,500 or greater.

             2)   Receives funds for any school facility construction 
               project from the state School Facility Program or from a 
               future state school bond. 

             3)   Involves a projected expenditure of one million 
               dollars ($1,000,000) or more. 

          This bill also requires school districts that  opt  to 
          prequalify bidders for a construction contract and that have 
          an average daily attendance of 2,500 or greater to:

             1)   Use a questionnaire that covers, at a minimum, the 
               issues covered by the standardized questionnaire and 
               model guidelines for rating bidders developed by the 
               Department of Industrial Relations (DIR).

             2)   Prequalify a prime contractor who provides a bid and, 
               if utilized, all electrical, mechanical and plumbing 
               subcontractors.

           BACKGROUND  





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          Current law requires the governing board of a school 
          district, to competitively bid, and award to the lowest 
          responsible bidder, any contract for a public project (as 
          defined) involving an expenditure of $15,000 or more.
          (Public Contract Code § 20111) 

          Current law also authorizes the governing board of the 
          district to require prequalification of prospective bidders 
          for a contract for a public project.  A prospective bidder 
          may be required to complete and submit to the district a 
          standardized questionnaire and financial statement in a form 
          specified by the district, including a complete statement of 
          the prospective bidder's financial ability and experience in 
          performing public works.  A school district that establishes 
          a prequalification process is required to adopt and apply a 
          uniform system of rating bidders on the basis of the 
          completed questionnaires and financial statements.  School 
          districts are authorized to establish a process for 
          prequalifying prospective bidders on a quarterly basis and to 
          consider a prequalification to be valid for up to one 
          calendar year following the date of initial prequalification. 
           (Public Contract Code § 20111.5) 

          Current law establishes the Local Agency Public Construction 
          Act (applicable to all public entities except school 
          districts), which, as the result of AB 574 (Hertzberg, 
          Chapter 972, Statutes of 1999), also authorizes a public 
          entity to require prequalification of prospective bidders for 
          a contract. Generally, these procedures parallel those that 
          existed for school districts.  In addition, AB 574 
          established the right of a bidder to dispute the public 
          entities proposed prequalification rating and requires an 
          appeal process that includes notification to the bidder, in 
          writing, of the basis for disqualification and supporting 
          evidence and the opportunity for the bidder to rebut this 
          evidence. As required under AB 574, the Department of 
          Industrial Relations (DIR), in collaboration and consultation 
          with affected agencies and interested parties, has developed 
          model guidelines for rating bidders and drafted a 
          standardized questionnaire for use by public entities for the 
          purpose of prequalification.  (Public Contract Code § 20100, 
          § 20101)

           ANALYSIS
           
           This bill  :




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          1)   Establishes new requirements for a school district that 
               opts to prequalify prospective bidders for a school 
               construction contract. Specifically it:

                    a)             Requires that the district use a 
                    questionnaire that covers, at a minimum, the issues 
                    covered by the standardized questionnaire and model 
                    guidelines for rating bidders developed by the DIR 
                    for use by public entities for this purpose under 
                    the Local Agency Public Construction Act (LAPCA).

                    b)             Prohibits the school district from 
                    accepting a bid from any prime contractor bidder, 
                    or any person or entity that uses an electrical, 
                    mechanical or plumbing subcontractors (defined as 
                    holding any of 11 different specified license 
                    classifications issued by the Contractor's State 
                    License Board) and is a prospective bidder on a 
                    project, unless they have submitted a completed 
                    financial statement and questionnaire for 
                    prequalification.

                    c)             Provides that a school district 
                    governing board is not precluded from prequalifying 
                    or disqualifying a subcontractor.

                    d)             Requires a school district that has 
                    a project that includes specified components to 
                    provide a list of prequalified electrical, 
                    mechanical and plumbing contracts to all bidders at 
                    least two business days prior to the dates fixed 
                    for the public opening of sealed bids. 

                    e)             Expands the timeframe requirements 
                    for submission of bids and prequalification, 
                    respectively, from five days to 10 days, and one 
                    day to five business days, before the fixed date 
                    for opening sealed bids. 

          2)   Requires a school district to prequalify a bidder for 
               any school facility construction project that receives 
               funds under the Leroy Green School Facilities Act of 
               1998 or from any future state school bond for a public 
               project, that involves a projected expenditure of one 
               million dollars ($1,000,000) or more.  More specifically 




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               it:

                    a)             Requires a district that does not 
                    use the procedures for prequalification established 
                    for school districts as specified in number (1), to 
                    use the prequalification procedures established for 
                    other public agencies under the LAPCA.

                    b)             Provides that bidder, for this 
                    purpose, includes the prime contractor and any 
                    electrical, mechanical or plumbing subcontractors, 
                    defined as holding any of 11 different specified 
                    license classifications issued by the Contractor's 
                    State License Board.

                    c)             Applies these provisions to 
                    contracts awarded on or after January 1, 2014.

          3)   Requires the Director of Industrial Relations to submit 
               a report to the Legislature that:

                    a)             Evaluates whether Labor Code 
                    violations on school district projects have 
                    decreased during the years these provisions are 
                    operative as compared to the same number of years 
                    prior to the bill's enactment.

                    b)             Recommends improvements to the 
                    system for prequalifying contractors and 
                    subcontractors on school district projects. 

          4)   Exempts school districts with an average daily 
               attendance of less than 2,500 from the provisions of the 
               bill.

          5)   Sunsets the bill's provisions on January 1, 2019.

           STAFF COMMENTS  

           1)   Need for the bill  .   According to the author, because 
               current law requires school districts to use the lowest 
               bidder, many unqualified contractors are being awarded 
               school construction projects with little or no 
               experience in school construction.  The author contends 
               that these contractors lack the financial fortitude to 
               accomplish a project on time and on budget, may file an 




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               exorbitant amount of change orders that increase project 
               costs, and that in many instances cut corners that 
               produce defects, prevailing wage violations and unsafe 
               working conditions for workers.  According to the 
               author, this bill will allow school districts 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.

           2)   Why only school districts  ?  AB 574 (Hertzberg, Chapter 
               972, Statutes of 1999) extended the authority to 
               prequalify contractors to all public agencies. 
               Currently, however, no government entity of any type is 
               required to prequalify contractors. California has 
               authorized over $28 billion in funding for K-12 
               facilities since 2002 (Propositions 1D, 55, and 47).  
               According to the sponsors, no other infrastructure 
               sector is as far reaching and as geographically diverse 
               as school construction and prequalification is necessary 
               to ensure the state's substantial investment results in 
               quality public school construction.

           3)   Mandates/increased costs to districts  .  This bill 
               results in a mandate as well as increased administrative 
               costs to school districts relative to school facility 
               construction. 

                  a)        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. 

                  b)        This committee recently heard and passed 
                    legislation to suspend level 3 developer fees, 
                    which means that, once state new construction funds 
                    are exhausted, districts will not have the ability 
                    to levy higher fees to developers to cover their 
                    school facility construction costs until 2014.

                  c)        The proposed budget for K-12 school 
                    districts relies upon a voter approved tax 
                    initiative, and contains automatic trigger cuts in 
                    order to accommodate that lost revenue should the 
                    measure fail passage. 





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               What is the cumulative effect of these policy and fiscal 
               decisions on school districts?  In light of the existing 
               budgetary challenges faced by school districts, is this 
               an appropriate time to enact another state reimbursable 
               mandate or impose additional fiscal burdens upon school 
               districts?

           1)   More requirements for "optional" prequalification  ?  This 
               bill requires all school districts with an ADA of 2,500 
               or more that  opt  to prequalify to be required to 
               prequalify a prime contractor that uses the specified 
               subcontractor and to prequalify the specified 
               subcontractors. The pilot program established by this 
               bill should lead to some information and recommendations 
               whether changes to the prequalification process, whether 
               optional or required, are appropriate. Aside from 
               creating a disincentive for school districts that might 
               otherwise consider the option of prequalification, these 
               new requirements on "optional" prequalification would 
               seem to be premature.  Shouldn't any changes to optional 
               prequalification requirements be based upon information 
               received via the pilot program and from the DIR report? 
                
               Staff recommends that the recent amendments to the 
               provisions outlining criteria for districts that opt to 
               prequalify be deleted from Section 1 of the bill. 

           2)   A step at a time  ? This bill requires the 
               prequalification of  subcontractors  by a school district 
               that receives state bond funds for a projected 
               expenditure of $1 million or more. The provisions around 
               prequalification of subcontractors raise the following 
               concerns:
                
                   a         Construction employers are concerned that 
                    requiring prequalification of subcontractors 
                    restricts legitimate competition and creates the 
                    ability for a limited group of subcontractors to 
                    essentially disqualify a general contractor by 
                    refusing to provide them with a bid.

                  b         Districts have already raised concerns 
                    about the administrative burden and increased 
                    potential for appeals by requiring 
                    prequalification.  The prequalification of 
                    subcontractors and the preparation and distribution 




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                    of lists of those who are prequalified creates an 
                    additional level of issues and mandates around 
                    administrative workload and potential appeal 
                    processes to respond to both contractors and 
                    subcontractors. 

                  c         This bill specifies the application of its 
                    provisions to very specific subcontractor license 
                    classifications.  According to the sponsors, this 
                    specificity is intended to ensure that the general 
                    categories of electrical, mechanical and plumbing 
                    contractors include "piping" contractors, "sheet 
                    metal" contractors and "air-conditioning" 
                    contractors.  What is the basis for 
                    including/excluding specific licensees? 

                  d         What is the profile of subcontractors who 
                    may be challenged to comply with and meet 
                    prequalification standards (generally focused on 
                    elements such as the company's financial status, 
                    whether they have completed other public works 
                    projects, or whether there is a history of 
                    violating any labor, health, or safety laws)?  How 
                    do these provisions affect Women and Minority-Owned 
                    Business Enterprises (WMBEs)?  How does it affect 
                    locally owned small businesses?

               This bill requires a report from the Department of 
               Industrial Relations regarding the implementation and 
               impacts of the bill's provisions.  In light of the 
               concerns surrounding prequalification generally, 
               shouldn't the extension of prequalification beyond prime 
               contractors await the findings from the pilot program?  
               Staff recommends that the requirement that 
               subcontractors be prequalified be deleted from the bill. 


               Staff further recommends that section 3 of the bill be 
               amended to clarify that the procedures for 
               prequalification of prime bidders by a school district 
               do not preclude a local school district governing board 
               from prequalifying or disqualifying a subcontractor.

           1)   Flexibility versus overall benefits  ?  Under current law, 
               schools districts may prequalify contractors if they 
               choose and are authorized to develop their own rating 




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               systems and questionnaires for this purpose. This bill 
               would require a school district that uses state bond 
               funds to prequalify prime contractors, and specified 
               subcontractors and to use a questionnaire that includes, 
               at a minimum, the issues covered by the standardized 
               questionnaire and model guidelines for rating bidders 
               developed by the DIR. 
                
                This bill has been amended from prior versions seen by 
               this committee to limit its application to school 
               districts with an ADA of 2,500 or more and to projects 
               that involve expenditures of $1 million or more, thereby 
               affecting approximately one-third of school districts.  
               As a pilot project, this bill could allow the 
               opportunity, to inform policymakers whether requiring 
               prequalification ultimately results in benefits to both 
               the district and the state.
                
           2)   Mandated costs  .  The Assembly Appropriations Committee 
               analysis notes unknown, but significant ongoing 
               state-reimbursable General Fund (Proposition 98) costs 
               to school districts related to establishing and 
               administering the prequalification process.  The 
               analysis also noted that additional costs would be 
               incurred to address appeals from contractors denied 
               qualification.  To the extent the prequalification 
               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.  According to the analysis, if the 
               prequalification process added 0.5% to project costs, 
               for every $500 million in school construction projects 
               exceeding $1 million, state mandated costs would be $2.5 
               million.

           3)   Prior legislation  .  

               a)        SB 600 (Rubio) would have required any school 
                    facility construction project that received funds 
                    under the state School Facility Program to 
                    prequalify all prospective bidders, and also 
                    required school districts that opt to prequalify 
                    bidders for a contract to use specified processes 
                    "substantially similar" to those developed by the 
                    Department of Industrial Relations.  SB 600 was 




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                    heard and passed by this committee by a vote of 6-3 
                    in May 2011, but was subsequently held under 
                    submission in the Assembly Appropriations 
                    Committee. When heard by Assembly Appropriations, 
                    SB 600 was almost identical to this bill.

               b)        SB 258 (Oropeza, 2010) would have required 
                    school districts to prequalify contractors on 
                    public works projects exceeding $1 million, 
                    pursuant to specified procedures.  SB 258 was held 
                    under submission in the Assembly Appropriations 
                    Committee.

           
          SUPPORT  

          California Association of Sheet Metal and Air Conditioning 
          Contractors' 
          California Legislative Conference of the Plumbing, Heating 
          and Piping 
               Industry 
          National Electrical Contractors Association - California 
          Chapter
          State Building and Construction Trades Council - AFL-CIO

           OPPOSITION

           Association of California Construction Managers
          California County Superintendents Educational Services 
          Association
          California School Board Association
          Coalition for Adequate School Housing
          Construction Employers' Association 
          County School Facilities Consortium