BILL ANALYSIS Ó
Bill No: SB
276
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Roderick D. Wright, Chair
2013-2014 Regular Session
Staff Analysis
SB 276 Author: Roth
As Introduced: February 14, 2013
Hearing Date: April 23, 2013
Consultant: Paul Donahue
SUBJECT
Small business and disabled veteran businesses: Public
contracts
DESCRIPTION
This bill increases from $250,000 to $500,000 the amount
for which a state agency can contract with a certified
small business (CSB) or a disabled veteran business
enterprise (DVBE) without having to comply with competitive
bidding laws.
EXISTING LAW
1)Establishes a 5% preference for bids made by certified
small business (CSB) and microbusiness for the award of
state procurement contracts.
2)Authorizes non-small businesses to qualify for the small
business bidders' preference if they sub-contract at
least 25% of their contracts with certified small
businesses.
3)Defines a small business as independently owned, not
dominant in its field of operation, domiciled in
California, employing 100 or fewer employees, and earning
$14 million or less in average annual gross revenues for
the three previous years.
SB 276 (Roth) continued
PageB
4)Describes a microenterprise as a small business with
average annual gross receipts of $250,000 or less during
the previous three years, or a manufacturer with 25 or
fewer employees.
5)Defines a DVBE as a business entity that is at least 51%
owned or controlled by one or more disabled veterans.
6)Authorizes a state agency to award a contract for goods,
services, or information technology with a value of
between $5,000 and $250,000 to a CSB, including a
microbusiness,<1> or to a DVBE, without complying with
specified competitive bidding requirements.
BACKGROUND
1)Purpose of the bill : According to the author's office,
this bill would allow CSBs and DVBEs to compete for state
contracts under the streamlined state contracting
process, and support small businesses throughout the
state.
2)The Small Business Procurement Act : This law was enacted
more than 30 years ago to establish a small business
preference within the state's procurement process,
intended to increase the number of contracts between the
state and small businesses. In 1989, a DVBE component was
added to state procurement practices.
Since 2001, there have been four Executive Orders (EO)
specifying goals for small business and DVBE
participation in state procurement contracts, including
EO D-37-01 (2001), EO S-02-06 (2006), EO D-43-01(2001),
and EO S-11-06 (2006). The first two EOs set 25% small
business participation goals, and the third set a 3% DVBE
participation goal for all state procurement contracts.
The fourth EO set a 25% participation goal for state
construction contracts, particularly those awarded by the
California Department of Transportation when implementing
Proposition 1B.
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<1> A microenterprise is a small business with average
annual gross receipts of $250,000 or less during the
previous three years, or a manufacturer with 25 or fewer
employees. [Govt. Code § 14837]
SB 276 (Roth) continued
PageC
Notwithstanding the longstanding existence of the Act and
these EOs, the state's success in obtaining small
business and DVBE participation goals in state
procurement contracts has been elusive.
3)Streamlined procurement process : This bill does not
amend the small business and DVBE bidding preference
laws. Rather, it deals with a separate provision of law,
under which contracting entities are authorized to use a
streamlined, expedited procurement method. This method
allows contracts to bypass the advertising, bidding, and
protest provisions in the State Contract Act, allowing
the agency to contract directly with a CSB or DVBE at a
contract price that is established by checking with two
small businesses or DVBEs to obtain "price quotations"
before awarding the contract.<2>
Contracts offered under the streamlined procurement
process are currently limited to contracts between $5,000
and $250,000. SB 276 would increase this amount to
$500,000 for contracts for goods, services, and
information technology.
4)Small businesses and DVBE challenges : Small businesses,
including microbusinesses and DVBEs, face a variety of
challenges in participating in state procurement
opportunities. One of those challenges is the access to
surety bonds for construction projects. Other challenges
include the high costs of purchasing, required levels of
liability insurance and meeting highly specific
accounting and reporting requirements for publicly funded
projects.
Another challenge is the increasing number of contracts
which are put to bid that exceed $1 million in value,
especially in construction and information technology
contracts, but increasingly in the state procurement of
goods and services as well. Firms having the capacity and
product inventory to be able to bid on these larger
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<2> Govt. Code § 14838.5, which also provides that if the
estimated cost to the state is less than $5000, or a
greater amount as established by the director of DGS, a
state agency must get at least 2 price quotations from
responsible suppliers whenever there is reason to believe a
response from a single source is not a fair and reasonable
price.
SB 276 (Roth) continued
PageD
contracts are usually too large to qualify as a small
business or DVBE.
Small business advocacy groups have been critical of
state agencies for not moving forward more aggressively
in bringing in small businesses to fill contracts for
state contracts for goods and services.
5)Over-reliance on CSB/DVBE subcontracting to meet CSB/DVBE
contracting goals : Beginning in 2005, DGS began what it
termed, a "major strategic sourcing initiative," which
was designed to make government purchases more cost
effective, while ensuring that the state taxpayers get
the best value. It is effectively impossible for any of
the state's CSBs and DVBEs to submit proposals or bids on
these contracts because of their multi-million dollar
size.
In order to increase CSB and DVBE participation in state
contracting and reach contracting goals, DGS relies
heavily on provisions of the Small Business Contracting
Act that allow a "non-small" business preference for
bidders that provide for CSB and DVBE subcontractor
participation. As a result, direct state contracting with
CSBs and DVBEs has diminished in recent years. A
significant portion of the CSB/DVBE contracting is
accomplished by way of subcontracts, in which the
"non-small" business is responsible for administering the
CSB/DVBE preference programs.
This trend toward huge state contracts has increased
concerns about whether a CSB or DVBE is in fact
performing a "commercially useful function," which is
required in state contracts in which small business
bidding preferences are applied. Last year, the
Legislature passed SB 1510 (Wright),<3> which added
additional functions that a small business must perform
to be providing a commercially useful function (CUF) in a
state contract. SB 1510 is designed to reduce instances
in which CUF rules are exploited, resulting in the
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. In these
instances, the CSB or DVBE is used as a "pass-through,"
whereby the CSB's involvement in performing work under
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<3> Chapter 421, Statutes of 2012
SB 276 (Roth) continued
PageE
the contract is essentially non-existent - the large
vendor simply lists the CSB or DVBE as its subcontractor
in order to gain the 5% bidding preference under state
law.
6)Statements of support : Supporters contend that this
alternative contracting route is a tool for agencies in
their commitment to comply with the CSB/DVBE contracting
mandate, permitting informal bid requests from CSBs and
DVBEs. They expect the changes proposed in the bill will
offer a powerful tool for agencies.
PRIOR/RELATED LEGISLATION
SB 1510 (Wright) Chapter 421, Statues of 2012. This bill
enacted additional conditions under which a certified small
business or microbusiness shall be deemed to perform a
commercially useful function, which is required in state
contracts in which small business bidding preferences are
used.
AB 31 (Price) Chapter 212, Statues of 2009. Increased the
maximum amount from $100,000 to $250,000 that a state
agency may award to a CSB or DVBE without complying with
specified competitive bidding requirements.
AB 669 (Cohn) Chapter 623, Statutes of 2003. Specified that
a certified small business or microbusiness must perform a
"commercially useful function" in relation to specified
state contracts. Also imposes certain penalties for
misrepresenting the performance of a commercially useful
function.
AB 608 (De La Torre) 2007-08 Session. Would have increased
the procurement contract bid preference from 5% to 10% for
small businesses and microbusinesses, or non-small
businesses that utilize small businesses and
microbusinesses as subcontractors, when the contract award
is made on the basis of either determining the lowest
responsible bidder, or when the contract is made on the
basis of determining the highest scored bidder, based on
evaluation factors other than bid price. (Vetoed)
SB 115 (Florez) Chapter 451, Statutes of 2005. Made various
changes to the DVBE Program, including requiring DGS to
establish a state agency-wide mandatory DVBE participation
SB 276 (Roth) continued
PageF
incentive. Also, required the DGS Small Business Advocate
to provide specified services to small businesses and
certified DVBEs.
SB 1008 (Machado) Chapter 632, Statutes of 2004. Among
other things, strengthened the sanctions that can be
imposed against businesses that fraudulently misrepresent
their eligibility for DVBE certification.
SUPPORT:
AMVETS, Department of California
California Association of County Veteran Service Officers
Disabled Veteran Business Alliance
Vietnam Veterans of America, California State Council
OPPOSE:
None on file
DUAL REFERRAL: Senate Appropriations Committee
FISCAL COMMITTEE: No.
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