BILL ANALYSIS Ó
Bill No: SB
1510
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Roderick D. Wright, Chair
2011-2012 Regular Session
Staff Analysis
SB 1510 Author: Wright
As Amended: March 27, 2012
Hearing Date: April 10, 2012
Consultant: Paul Donahue
SUBJECT
Certified small business contracting; Commercially useful
function
DESCRIPTION
This bill would add additional conditions under which a
certified small business or microbusiness is deemed to
perform a commercially useful function, which is required
in state contracts in which small business bidding
preferences are applied. Specifically, this bill :
1)Incorporates two additional functions that a certified
small business or microbusiness must perform under a
state contract in order to be providing a commercially
useful function. Added to the existing list of required
functions are the following:
a) The business is responsible, with respect to
materials and supplies required for the contract, for
negotiating price, determining quality and quantity,
ordering material, installing, if applicable, and
paying for the material itself.
b) The business is responsible for the accounts
receivable of the business, and the accounts
receivable of the business are not controlled directly
or indirectly by a prime contractor.
SB 1510 (Wright) continued
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EXISTING LAW
1)Requires the Director of General Services and the heads
of other state agencies that enter into contracts for the
provision of goods, services, and information technology
to establish goals for the participation of small
businesses in these contracts. ÝSmall Business
Procurement and Contract Act]
2)Establishes a 5% preference for bids made by certified
small businesses (CSB) and microbusiness for the award of
state procurement contracts, and permits non-small
businesses that sub-contract at least 25% of their
contracts with small businesses, to qualify for the small
business bidders' preference.
3)Specifies that a CSB or microbusiness must perform a
"commercially useful function" in state contracts, and
imposes civil penalties on any person that knowingly and
fraudulently represents that a commercially useful
function is being performed by a CSB or microbusiness in
order to obtain or retain a bid preference or a state
contract.
4)Provides that a CSB or microbusiness is deemed to perform
a commercially useful function if the business does all
of the following:
a) Is responsible for execution of a distinct element
of the work of the contract.
b) Fulfills its duty by actually performing, managing,
or supervising the work.
c) Performs work that is normal for its business
services and functions.
d) Is not subcontracting a portion of the work to an
extent greater than expected to be subcontracted by
normal industry practices.
5)Specifies that a contractor, subcontractor, or supplier
will not be considered to perform a commercially useful
function if its role is limited to that of an extra
participant in a transaction, contract, or project
through which funds are passed in order to obtain the
SB 1510 (Wright) continued
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appearance of CSB or microbusiness participation.
BACKGROUND
1)Purpose : The author states that this bill will clarify
and strengthen existing laws pertaining to two key terms
relating to small businesses bidding on state contracts
in order to stop the practice of using sham small
businesses to get state contracts.
2)Getting the contract but not doing the work : The 5% bid
preference on state contracts for certified small
businesses (CSBs) is often enough to make a difference in
the awarding of a contract for the provision of goods or
services. Large businesses that subcontract at least 25%
of their contracts with CSBs also qualify for this 5%
bidders' preference.
The author and the sponsors state that, although existing
law requires a CSB to perform a commercially useful
function (CUF) in a state contract where the bid
preference was applied, the CUF rules are exploited in
practice, resulting in awarding of contracts to firms
that have misrepresented the CSB status of contractors or
subcontractors, or the actual work done by the CSB on the
contract.
3)" Normal industry practices :" Among the conditions that a
CSB must meet in order to perform a commercially useful
function (CUF) on a state contract requires a CSB not to
subcontract a portion of the work to an extent greater
than expected to be subcontracted by normal industry
practices.
The sponsors complain of instances in which CSBs enter
into brokering arrangements that enable the CSB to
schedule deliveries and provide customer service duties,
but these CSBs actually contract with a large company for
warehousing and actual delivery of the product. Although
this might fall within "normal industry practice," this
arrangement does not represent a "commercially useful
function" because the CSB has no employees, no overhead,
and was only made a party to the contract to take
advantage of the 5% bid preference.
The sponsors state that these business arrangements serve
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to place legitimate CSBs at a competitive disadvantage,
and are contrary to the intent of the Small Business
Procurement and Contracting Act.
Therefore, this bill would enact an additional CUF
condition requiring that the CSB be responsible, with
respect to materials and supplies required for the
contract, for negotiating price, determining quality and
quantity, ordering material, installing, if applicable,
and paying for the material itself.
4)Proposed DGS regulations : This bill contains a provision
that the Department of General Services (DGS) has
promulgated in draft regulations governing commercially
useful functions that apply specifically to disabled
veteran business enterprises (DVBE).<1> The regulations
add a provision that is contained in this bill, namely
one that requires the DVBE to:
"?be responsible, with respect to materials and
supplies required for the contract, for
negotiating price, determining quality and
quantity, ordering material, installing (when
applicable), and paying for the material itself."
Ýproposed Section 1896.62 (m) (5), 2 Cal. Code
Regs].
5)Pass-through companies : This bill would add a condition
to the commercially useful function (CUF) statute
requiring a certified small business (CSB) to be
responsible for the accounts receivable of the business,
and prohibiting the prime contractor from directly or
indirectly controlling the accounts receivable of the
CSB.
This bill incorporates provisions included in federal
legislation proposed in 2010, which declares that "an
entity is a pass-through business with respect to another
business when the accounts receivable of the business is
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<1> Under existing law, the CUF standards apply only to
certified small businesses and microbusinesses; however DGS
is empowered to adopt regulations and rules governing to
aid and protect the interest of CSBs, microbusinesses, and
DVBEs in contracting with the state. ÝSee, Govt. Code §§
14839, 14843]
SB 1510 (Wright) continued
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directly or indirectly controlled by such other
business." <2>
These provisions are designed to tighten the rules to
eliminate the practice of using certified small
businesses as "pass-throughs," whereby the CSB's
day-to-day involvement in performing under the contract
is essentially non-existent, yet these brokering
arrangements ultimately benefit the large vendor who is
using the small business as its pass-through in order to
gain the 5% bidding preference.
6)Support : Supporters write that this measure would clarify
and strengthen the five CUF requirements that define
"responsible bidder" with respect to materials and
supplies required for a contract. They state that the
bill would also address the situation where there is
joint control of the accounts receivable via a lockbox,
the product is invoiced, but payments are not made by the
certified small business. In this instance, the company
is merely a "pass-through" and is non-CUF compliant.
PRIOR/RELATED LEGISLATION
AB 669 (Cohn) Chapter 623, Statutes of 2003) . Specifies
that a certified small business or microbusiness must
perform a "commercially useful function" in relation to
specified state contracts, and also imposes certain
penalties for misrepresenting the performance of a
commercially useful function.
SUPPORT:
California Black Chamber of Commerce
California Small Business Association (sponsor)
Coalition of Small and Disabled Veteran Businesses
(sponsor)
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<2> H.R. 4420 (Sestak). H.R. 4420 was held in policy
committee. Sponsors expect to re-introduce the measure
later this year, following receipt of a study of the issue
by the U.S. Small Business Administration (SBA). In the
2012 Financial Services Appropriations budget, Congress
directed SBA to submit a report within 180 days identifying
administrative, legislative, and regulatory steps that
could be taken to address the practice of "pass-throughs"
as it relates to Federal small business contracting.
SB 1510 (Wright) continued
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OPPOSE:
None on file
FISCAL COMMITTEE: Senate Appropriations Committee
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