BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 1510|
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THIRD READING
Bill No: SB 1510
Author: Wright (D), et al.
Amended: 5/2/12
Vote: 21
SENATE GOVERNMENTAL ORGANIZATION COMM : 12-0, 04/10/12
AYES: Wright, Anderson, Berryhill, Calderon, Cannella,
Corbett, De León, Hernandez, Padilla, Walters, Wyland,
Yee
NO VOTE RECORDED: Evans
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
SUBJECT : Department of General Services: small business
contracts
SOURCE : California Small Business Association
Coalition of Small and Disabled Veteran
Businesses
DIGEST : This bill adds 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.
ANALYSIS : Existing law:
1.Requires the Director of General Services and the heads
of other state agencies that enter into contracts for the
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provision of goods, services, and information technology
to establish goals for the participation of small
businesses in these contracts.
2.Establishes a five percent 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
percent 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.
1.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
appearance of CSB or microbusiness participation.
This bill 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
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of required functions are the following:
1.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.
2.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.
Background
According to the author's office, this bill clarifies and
strengthens 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.
Getting the contract but not doing the work . The five
percent bid preference on state contracts for 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 percent of their contracts
with CSBs also qualify for this five percent 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.
" Normal industry practices ." Among the conditions that a
CSB must meet in order to perform a 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.
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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 five percent
bid preference.
The sponsors state that these business arrangements serve
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.
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). 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."
Pass-through companies . This bill would add a condition to
CUF statute requiring a 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
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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
directly or indirectly controlled by such other business."
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 five percent bidding
preference.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 4/30/12)
California Small Business Association (co-source)
Coalition of Small and Disabled Veteran Businesses
(co-source)
California Black Chamber of Commerce (per Senate
Governmental
Organization Committee analysis)
California Small Business Association
Coalition of Small and Disabled Veteran Businesses
ARGUMENTS IN SUPPORT : Supporters write that this bill
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.
DLW:nl 5/1/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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