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 AB 1565 Page 2 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 : AB 1565 Page 3 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 AB 1565 Page 4 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 AB 1565 Page 5 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. AB 1565 Page 6 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 AB 1565 Page 7 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 AB 1565 Page 8 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 AB 1565 Page 9 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