BILL ANALYSIS Ó AB 975 Page 1 Date of Hearing: April 22, 2015 ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT Brian Maienschein, Chair AB 975 (Frazier) - As Amended March 26, 2015 SUBJECT: Local Agency Public Construction Act: bid criteria. SUMMARY: Prohibits local public agencies and school districts from disqualifying prospective bidders on public works contracts based on a bidder's involvement in a claim filed by either the bidder or the project owner. Specifically, this bill: 1)Prohibits any public agency or school district requiring prospective bidders to complete and submit pre-qualification questionnaires from disqualifying or otherwise penalizing a prospective bidder through its uniform system of rating bidders based on either of the following: a) A prospective bidder is or has been involved in an affirmative claim filed by a project owner through the courts, mediation, or arbitration; or, b) A prospective bidder has filed a claim through the courts, mediation, or arbitration against a project owner. AB 975 Page 2 2)Specifies that "affirmative claim" or "claim" does not include any claim based on a violation of the Labor Code. 3)Specifies that nothing in this bill precludes a public agency or school district from including in its uniform system of rating bidders criteria related to affirmative claims that have been finally adjudicated or settled, provided the settlement or final judgment or award on the affirmative claim is greater than 20% of the adjusted contract amount against the prospective bidder. 4)Provides that, if the Commission on State Mandates determines that this bill contains costs mandated by the state, reimbursement to local agencies and school districts for those costs shall be made pursuant to current law governing state mandated local costs. EXISTING LAW: 1)States that the objective of the Public Contract Code (PCC) is to provide all qualified bidders with a fair opportunity to enter the bidding process, thereby stimulating competition, and to eliminate favoritism, fraud, and corruption in the awarding of public contracts, among other provisions. 2)Provides the following definitions under the PCC: AB 975 Page 3 a) Defines public works contract as "an agreement for the erection, construction, alteration, repair, or improvement of any public structure, building, road, or other public improvement of any kind;" b) Defines "public entity" to mean the state, county, city, city and county, district, public authority, public agency, municipal corporation, or any other political subdivision or public corporation in the state; and, c) Defines the term "responsible bidder" to mean a bidder who has demonstrated the attribute of trustworthiness, as well as quality, fitness, capacity, and experience to satisfactorily perform the public works contract. 3)Requires local officials, under the Local Agency Public Construction Act (LAPC Act), to invite bids for construction projects and then award contracts to the lowest responsible bidder. 4)Allows, pursuant to the LAPC Act, public entities to require prospective bidders to complete standardized questionnaires and financial statements with specified information for the purpose of pre-qualifying bidders. 5)Requires the State Department of Industrial Relations (DIR) to AB 975 Page 4 develop model guidelines for rating bidders. 6)Requires any public entity electing to make bidders complete a questionnaire and financial statement to adopt and apply a uniform system of rating bidders based on objective criteria. 7)Requires public entities that require questionnaires and statements to establish a process that will allow prospective bidders to dispute the proposed qualification rating before the closing time for receipt of bids. 8)Allows school districts to require prospective bidders on specified contracts that school districts must put out to bid to complete and submit standardized questionnaires and financial statements. School districts must adopt a uniform system for rating bidders based on the questionnaires and statements. 9)Requires, until January 1, 2019, school districts entering into lease/leaseback or lease-to-own contracts to comply with specified pre-qualification requirements, if the project is funded with state bond funds, the expenditure of the project is $1 million or more, and the average daily attendance (ADA) of the school district is more than 2,500. FISCAL EFFECT: This bill is keyed fiscal and contains a state-mandated local program. AB 975 Page 5 COMMENTS: 1)Bill Summary. This bill prohibits public agencies and school districts that require prospective bidders to complete and submit pre-qualification questionnaires from disqualifying or otherwise penalizing a prospective bidder through their uniform system of rating bidders based on either of the following: a) A prospective bidder is or has been involved in an affirmative claim filed by a project owner through the courts, mediation, or arbitration; or, b) A prospective bidder has filed a claim through the courts, mediation, or arbitration against a project owner. The bill exempts claims based on a violation of the Labor Code, and specifies that it doesn't preclude a public agency or a school district from including in its uniform system of rating bidders criteria related to affirmative claims that have been finally adjudicated or settled, provided the settlement or final judgment or award on the affirmative claim is greater than 20% of the adjusted contract amount against the prospective bidder. This bill is sponsored by the Construction Employers' Association. 2)Author's Statement. According to the author, "AB 975 is intended to address a troubling trend involving public works AB 975 Page 6 construction pre-qualification questionnaires. Specifically, a number of public agencies have begun disqualifying, or significantly penalizing through their pre-qualification process, any contractor who has been involved, or is involved, in any claim with a public agency, whether initiated by the contractor or the public agency. "These pre-qualification questions represent a fundamental denial of a contractor's basic due process rights. The automatic disqualification ignores the specific circumstances surrounding a claim, the severity of the claim, the outcome of the claim, whether the contractor prevailed, whether the claim was the result of a subcontractor, architect or engineer or whether the claim was simply erroneous. Also, because of privity of contract, claims related to subcontractors are attributed to general contractors so the claim itself may have nothing to do with the general contractor." 3)Background. The LAPC Act allows, but does not require, public agencies to establish a process to evaluate and pre-qualify prospective bidders on public works projects. An agency may choose to require prospective bidders to submit a standardized questionnaire and a financial statement, which includes the prospective bidder's experience in performing public works. If the agency selects this procedure, it must adopt a uniform rating system to determine the minimum requirements permitted for qualification to bid and the type and size of contracts for which each bidder is eligible to bid. It also must offer an appeals process to allow prospective bidders to dispute their proposed pre-qualification rating. AB 975 Page 7 The LAPC Act directs DIR to develop a model questionnaire and guidelines for a uniform rating system that can be used by public agencies. The DIR questionnaire requires contractors to provide detailed information regarding the company and its financial status, including whether the company has been in bankruptcy or involved in a civil lawsuit, licensing information, prior contracting experience (whether the contractor has completed other public works projects), whether the contractor has been involved or been found to have violated any federal, state or local laws, and whether the contractor has violated any labor and health and safety laws, including prevailing wage. A rating system assigns points according to a bidder's answers to the questionnaire and enables a local agency to exclude bids from companies that do not meet a minimum number of points. According to DIR, "Each public agency?is free to devise its own 'uniform system of rating prospective bidders . . . based on objective criteria.' That is, each public agency may determine its own scoring system and its own passing scores for different portions of the questionnaire..." The Local Agency Public Construction Act applies to all cities, counties and special districts, but does not apply to school districts, which have separate code sections pertaining to pre-qualification. (This analysis is limited to the jurisdiction of the Local Government Committee, which does not include the provisions of this bill pertaining to school districts.) AB 975 Page 8 4)DIR's Model Pre-Qualification Questionnaire. DIR's model questionnaire includes the following questions regarding claims: a) "In the past five years has any claim against your firm concerning your firm's work on a construction project been filed in court or arbitration? If 'yes,' on separate signed sheets of paper identify the claim(s) by providing the project name, date of the claim, name of the claimant, a brief description of the nature of the claim, the court in which the case was filed and a brief description of the status of the claim (pending or, if resolved, a brief description of the resolution). b) "In the past five years has your firm made any claim against a project owner concerning work on a project or payment for a contract and filed that claim in court or arbitration? If 'yes,' on separate signed sheets of paper identify the claim by providing the project name, date of the claim, name of the entity (or entities) against whom the claim was filed, a brief description of the nature of the claim, the court in which the case was filed and a brief description of the status of the claim (pending, or if resolved, a brief description of the resolution). DIR's model questionnaire or guidelines for rating bids does not contain language disqualifying contractors for affirmative answers to these questions. It does, however, provide a scoring system for these questions that assigns points based on the firm's gross revenue and number of occurrences. A AB 975 Page 9 bidder with more claims earns fewer points. 5)Local Agency Pre-Qualification Questionnaires. According to the sponsor of this bill, a number of local agencies are disqualifying contractors that have been involved in claims against the contractor by a project owner or filed by a contractor against an owner. Examples provided include: a) A city contract documents stating, "At the time of submission of this proposal package, the Contractor, or any subsidiary, parent, holding company or affiliate, or any of their respective owners, partners, or officers shall not be a plaintiff in an active lawsuit against a public agency;" b) A city contract that disqualified any firm that answered yes to the following: "In the past five years, has an owner filed, in a court of law or in an arbitration, any claim against your firm concerning your firm's work on a construction project, and either: i) Your firm's average gross revenue for the last three years was less than $50 million and two or more separate claims have been filed against your firm; or, ii) Your firm's average gross revenue for the last three years was more than $50 million and five or more separate claims have been filed against your firm?" AB 975 Page 10 6)Policy Considerations. The Committee may wish to consider the following: a) No Disqualification, Automatic or Otherwise. This bill prohibits local agencies and school districts from disqualifying a prospective bidder with current or prior claims as described in the bill. While automatic disqualification, without considering any of the details or circumstances of a bidder's claims history, might be a practice that should be curtailed, the Committee may wish to consider whether a local agency or school district should no longer have the option of disqualifying a bidder after evaluating that bidder's track record of claims. b) "Penalizing" Prospective Bidders. This bill prohibits local agencies and school districts from penalizing in their rating systems a prospective bidder that has an involvement in claims as described in the bill. DIR's model rating system allows this practice. The Committee may wish to consider retaining the bill's provision that prohibits outright disqualification, but striking the language in the bill that prohibits "penalizing." c) Settlement Amount Limit. This bill contains language that states, "Nothing in this bill precludes a public agency or school district from including in its uniform system of rating bidders criteria related to affirmative claims that have been finally adjudicated or settled, provided the settlement or final judgment or award on the AB 975 Page 11 affirmative claim is greater than 20% of the adjusted contract amount against the prospective bidder." This limit on the rating system based on settlement amounts does not appear in DIR guidelines. The Committee may wish to consider whether this is an appropriate limit to impose on pre-qualification questionnaires. d) Existing Dispute Process. Current law allows contractors to dispute a local agency's proposed qualification rating. The Committee may wish to ask the author to explain why the existing dispute process is problematic. e) Prevalence. It is not clear how many local jurisdictions or school districts are disqualifying contractors based on claims filed by or against them. The Committee may wish to ask the author if there is any additional evidence of this practice by California local agencies and school districts. f) Affirmative claim. There is no definition in this bill of the term "affirmative claim." The Committee may wish to define this term or strike it from the bill. 7)Technical Amendments. The Committee may wish to amend Sections 2 and 3 of the bill to delete references to "public agency" and replace them with "district," as those sections apply to school districts. AB 975 Page 12 8)Related Legislation. AB 566 (O'Donnell), pending in the Assembly Education Committee, requires, until January 1, 2019, school districts to require prospective bidders on public contracts to submit a pre-qualification questionnaire and financial statement, if the expenditure of the project is $1 million or more, regardless of the funding source, and the ADA of the school district is more than 2,500 (among other provisions). 9)Previous Legislation. AB 1581 (Buchanan), Chapter 408, Statutes of 2014, required, until January 1, 2019, school districts entering into lease/leaseback or lease-to-own contracts to require prospective bidders to submit a pre-qualification questionnaire and financial statement, if the project is funded with state bond funds, the expenditure of the project is $1 million or more, and the ADA of the school district is more than 2,500. AB 1565 (Fuentes), Chapter 808, Statutes of 2012, required, beginning with contracts awarded on or after January 1, 2014 and until January 1, 2019, school districts to require prospective bidders on public contracts to submit a pre-qualification questionnaire and financial statement, if the project is funded with state bond funds, the expenditure of the project is $1 million or more, and the ADA of the school district is more than 2,500. AB 975 Page 13 AB 281 (Burmudez) of 2003 would have prohibited the bidder pre-qualification form that is required under the LAPC Act from disqualifying a bidder solely based on the bidder's financial capacity, provided that the bidder otherwise qualifies for the public works contract. This bill was referred to the Assembly Local Government Committee, but was never heard. AB 574 (Hertzberg), Chapter 972, Statutes of 1999, defined the term "responsible bidder" as it relates to public contracts, authorized public entities to require prospective bidders to complete pre-qualification questionnaires and financial statements, and required DIR to develop a model questionnaire and guidelines for rating bidders. AB 611 (Villaraigosa), Chapter 390, Statutes of 1997, allowed school districts to pre-qualify bidders on a quarterly basis and allowed the pre-qualification to be valid for up to one calendar year. 10)State Mandate. This bill is keyed a state mandate, which means the state could be required to reimburse local agencies and school districts for implementing the bill's provisions if the Commission on State Mandates determines that the bill contains costs mandated by the state. AB 975 Page 14 11)Arguments in Support. The Associated General Contractors, in support of this measure, state, ""Proliferation of these types of pre-qualification questionnaires will enable public agencies to renegotiate contract terms because they know that any claim will adversely impact a contractor on a future pre-qualification. The questions will also have a chilling effect on the filing of otherwise legitimate claims by contractors because of the potential impact on future pre-qualification questionnaires. Finally, these types of questions will also minimize the pool of otherwise qualified contractors and drive prices up." 12)Arguments in Opposition. None on file. 13)Double-Referral. This bill is double-referred to the Accountability and Administrative Review Committee. AB 975 Page 15 REGISTERED SUPPORT / OPPOSITION: Support Construction Employers' Association [SPONSOR] Air Conditioning Sheet Metal Association Air-conditioning & Refrigeration Contractors Association Associated General Contractors California Chapters of the National Electrical Contractors Association (NECA) California Legislative Conference of the Plumbing, Heating and Piping Industry (CLC) Finishing Contractors Association of Southern California United Contractors AB 975 Page 16 Opposition None on file Analysis Prepared by:Angela Mapp / L. GOV. / (916) 319-3958