Amended in Senate April 21, 2016

Senate Bill No. 1176

Introduced by Senators Galgiani and Hueso

(Principal coauthor: Senator Hertzberg)

(Principal coauthor: Assembly Member Jones-Sawyer)

February 18, 2016

An act to amend Sections 14837 and 14838 of the Government Code, relating to public contracts.

LEGISLATIVE COUNSEL’S DIGEST

SB 1176, as amended, Galgiani. Small Business Procurement and Contract Act: business size.

The Small Business Procurement and Contract Act requires the Director of General Services and the heads of other state agencies that enter into contracts for the acquisition of goods, services, and information technology and for the construction of state facilities to establish goals for the participation of small businesses and microbusinesses in these contracts, to provide for a small business preference in the award of these contracts, to give special consideration and special assistance to small businesses, and, whenever possible, to make awards to small businesses, as specified. Existing law defines a “small business” for these purposes as, among other things, an independently owned and operated business that is not dominant in its field of operation that has average annual gross receipts of $10 million, as may be adjusted to reflect changes in the California Consumer Price Index, or less over the previous 3 years. Existing law defines a “microbusiness” as a small business which, together with affiliates, has average annual gross receipts of $2.5 million, as may be adjusted to reflect changes in the California Consumer Price Index, or less over the previous 3 years. Existing law requires the director to conduct a biennial review of those average annual gross receipt levels and authorizes the director to adjust the average annual gross receipts threshold to reflect changes in the California Consumer Price Index for all items. Existing law requires a contractor requesting a small business or microbusiness preference to do so under penalty of perjury.

This bill would revise those definitions by increasing the dollar amount threshold for a small business to begin delete $30 million end delete begin insert $15 million end insert and for a microbusiness to $5 million and would require those dollar amounts to be adjusted to reflect changes in the California Consumer Price Index biennially. begin insert The bill would further revise the definition of small business by specifying that, for the purposes of public works contracts, small business means a businesses with 200 or fewer employees and average annual gross receipts of $25 million or less. end insert The bill would allow directors of the department and other state agencies to count contractors that would be considered a small business or microbusiness under the changes made by this bill for the year this bill is enacted if the directors are unable to make the small business participation goals under the existing laws. The bill would allow more contractors to qualify as a small business or microbusiness, thus expanding the group of contractors authorized to request a preference filed under penalty of perjury. By expanding the crime of perjury, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program: yes.

The people of the State of California do enact as follows:

SECTION 1.  

The Legislature hereby finds and declares all of
the following:

(a) The essence of the American economic system of private
enterprise is to be free, open, and to have transparent competition.
Only through free, open, and transparent competition can free
markets, reasonable and just prices, free entry into business, and
opportunities for the expression and growth of personal initiative
and individual judgment be ensured. The preservation and
expansion of that competition are basic to the economic well-being
of this state, and that well-being cannot be realized unless the
actual and potential capacity of small business enterprises is
encouraged and developed.

(b) It is the policy of the state to aid the interests of small
business enterprises in order to preserve reasonable and just prices
and free competitive enterprise, to ensure that a fair proportion of
the total purchases and contracts or subcontracts for commodities,
supplies, technology, property, and services, including, but not
limited to, renewable energy, wireless telecommunications,
broadband, smart grid, rail, and other mega infrastructure projects,
for regulated state departments are awarded to small business
enterprises, and to maintain and strengthen the overall economy
of the state.

(c) The opportunity for full participation in our free enterprise
system by small business enterprises is essential if this state is to
attain social and economic equality for those businesses and
improve the functioning of the state economy.

(d) State agencies that have established small business
contracting goals are awarding less than 25 percent of their
mandated goals.

(e) Small business enterprises have traditionally received less
than their proportional share of public entity procurement contracts,
especially in renewable energy, wireless telecommunications,
broadband, smart grid, rail, and other mega infrastructure projects.

(f) It is in the interest of the state to expeditiously improve the
economically disadvantaged position of small business owners
and employees.

(g) The position of small business enterprises can be
substantially improved by expanding the definition of a small
business that would allow these businesses to amass the capital
and expertise necessary to compete for state procurement of
technology, equipment, supplies, services, materials, and
construction work, especially in renewable energy, wireless
telecommunications, broadband, smart grid, rail, and other mega
infrastructure projects. This expansion also benefits the state
departments and consumers of the state by encouraging the
expansion of the number of small business enterprise suppliers for
procurements, thereby encouraging competition among the
suppliers and promoting economic efficiency in the process.

(h) The long-term economic viability of this state depends
substantially upon the ability of small businesses to be successful.

SEC. 2.  

It is the intent of the Legislature by enacting this
legislation to do all of the following:

(a) Encourage greater economic opportunity for small
businesses.

(b) Promote competition among state departments that issue
contracts in order to enhance economic efficiency in the
procurement of state services.

(c) Clarify and expand the program for the procurement by state
departments for small business enterprises.

SEC. 3.  

Section 14837 of the Government Code is amended
to read:

14837.  

As used in this chapter:

(a) “Department” means the Department of General Services.

(b) “Director” means the Director of General Services.

(c) “Manufacturer” means a business that meets both of the
following requirements:

(1) It is primarily engaged in the chemical or mechanical
transformation of raw materials or processed substances into new
products.

(2) It is classified between Codes 31 to 33, inclusive, of the
North American Industry Classification System.

(d) (1)  begin insert (A) end insert begin insert   end insert “Small business” means an independently owned
and operated business that is not dominant in its field of operation,
the principal office of which is located in California, the officers
of which are domiciled in California, and which, together with
affiliates, has 100 or fewer employees, and average annual gross
receipts of begin delete thirty million dollars ($30,00,000) end delete begin insert fifteen million dollars
($15,000,000) end insert or less over the previous three years, or is a
manufacturer, as defined in subdivision (c), with 100 or fewer
employees.

begin insert

(B) For the purposes of public works contracts, contracts
awarded through competitive bids or otherwise for the erection,
construction, alteration, repair, or improvement of any kind upon
real property, “small business” means an independently owned
and operated business that is not dominant in its field of operation,
the principal office of which is located in California, the officers
of which are domiciled in California, and which, together with
affiliates, has 200 or fewer employees, and average annual gross
receipts of twenty-five million dollars ($25,000,000) or less over
the previous three years.

end insert

(2) “Microbusiness” is a small business which, together with
affiliates, has average annual gross receipts of five million dollars
($5,000,000) or less over the previous three years, or is a
manufacturer, as defined in subdivision (c), with 25 or fewer
employees.

(3) The director shall conduct a biennial review of the average
annual gross receipt levels specified in this subdivision and shall
adjust that level to reflect changes in the California Consumer
Price Index for all items. To reflect unique variations or
characteristics of different industries, the director may establish,
to the extent necessary, either higher or lower qualifying standards
than those specified in this subdivision, or alternative standards
based on other applicable criteria.

(4) Standards applied under this subdivision shall be established
by regulation, in accordance with Chapter 3.5 (commencing with
Section 11340) of Part 1 of Division 3 of Title 2, and shall preclude
the qualification of businesses that are dominant in their industry.
In addition, the standards shall provide that the certified small
business or microbusiness shall provide goods or services that
contribute to the fulfillment of the contract requirements by
performing a commercially useful function, as defined below:

(A) A certified small business or microbusiness is deemed to
perform a commercially useful function if the business does all of
the following:

(i) Is responsible for the execution of a distinct element of the
work of the contract.

(ii) Carries out its obligation by actually performing, managing,
or supervising the work involved.

(iii) Performs work that is normal for its business services and
functions.

(iv) Is responsible, with respect to products, inventories,
materials, and supplies required for the contract, for negotiating
price, determining quality and quantity, ordering, installing, if
applicable, and making payment.

(v) Is not further subcontracting a portion of the work that is
greater than that expected to be subcontracted by normal industry
practices.

(B) A contractor, subcontractor, or supplier will not be
considered to perform a commercially useful function if the
contractor’s, subcontractor’s, or supplier’s 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 small
business or microbusiness participation.

(e) “Disabled veteran business enterprise” means an enterprise
that has been certified as meeting the qualifications established by
paragraph (7) of subdivision (b) of Section 999 of the Military and
Veterans Code.

SEC. 4.  

Section 14838 of the Government Code is amended
to read:

14838.  

In order to facilitate the participation of small business,
including microbusiness, in the provision of goods, information
technology, and services to the state, and in the construction
(including alteration, demolition, repair, or improvement) of state
facilities, the directors of the department and other state agencies
that enter those contracts, each within their respective areas of
responsibility, shall do all of the following:

(a) Establish goals, consistent with those established by the
Office of Small Business Certification and Resources, for the extent
of participation of small businesses, including microbusinesses,
in the provision of goods, information technology, and services to
the state, and in the construction of state facilities.

(b) Provide for small business preference, or nonsmall business
preference for bidders that provide for small business and
microbusiness subcontractor participation, in the award of contracts
for goods, information technology, services, and construction, as
follows:

(1) In solicitations where an award is to be made to the lowest
responsible bidder meeting specifications, the preference to small
business and microbusiness shall be 5 percent of the lowest
responsible bidder meeting specifications. The preference to
nonsmall business bidders that provide for small business or
microbusiness subcontractor participation shall be, up to a
maximum of 5 percent of the lowest responsible bidder meeting
specifications, determined according to rules and regulations
established by the Department of General Services.

(2) In solicitations where an award is to be made to the highest
scored bidder based on evaluation factors in addition to price, the
preference to small business or microbusiness shall be 5 percent
of the highest responsible bidder’s total score. The preference to
nonsmall business bidders that provide for small business or
microbusiness subcontractor participation shall be up to a
maximum 5 percent of the highest responsible bidder’s total score,
determined according to rules and regulations established by the
Department of General Services.

(3) The preferences under paragraphs (1) and (2) shall not be
awarded to a noncompliant bidder and shall not be used to achieve
any applicable minimum requirements.

(4) The preference under paragraph (1) shall not exceed fifty
thousand dollars ($50,000) for any bid, and the combined cost of
preferences granted pursuant to paragraph (1) and any other
provision of law shall not exceed one hundred thousand dollars
($100,000). In bids in which the state has reserved the right to
make multiple awards, this fifty thousand dollar ($50,000)
maximum preference cost shall be applied, to the extent possible,
so as to maximize the dollar participation of small businesses,
including microbusinesses, in the contract award.

(c) Give special consideration to small businesses and
microbusinesses by both:

(1) Reducing the experience required.

(2) Reducing the level of inventory normally required.

(d) Give special assistance to small businesses and
microbusinesses in the preparation and submission of the
information requested in Section 14310.

(e) Under the authorization granted in Section 10163 of the
Public Contract Code, make awards, whenever feasible, to small
business and microbusiness bidders for each project bid upon
within their prequalification rating. This may be accomplished by
dividing major projects into subprojects so as to allow a small
business or microbusiness contractor to qualify to bid on these
subprojects.

(f) Small business and microbusiness bidders qualified in
accordance with this chapter shall have precedence over nonsmall
business bidders in that the application of a bidder preference for
which nonsmall business bidders may be eligible under this section
or any other provision of law shall not result in the denial of the
award to a small business or microbusiness bidder. In the event of
a precise tie between the low responsible bid of a bidder meeting
specifications of a small business or microbusiness, and the low
responsible bid of a bidder meeting the specifications of a disabled
veteran-owned small business or microbusiness, the contract shall
be awarded to the disabled veteran-owned small business or
microbusiness. This provision applies if the small business or
microbusiness bidder is the lowest responsible bidder, as well as
if the small business or microbusiness bidder is eligible for award
as the result of application of the small business and microbusiness
bidder preference granted by subdivision (b).

(g) If the directors of the department and other state agencies
that enter into those contracts are unable to reach the goals
established under subdivision (a) in the year begin delete this measure is enacted end delete
begin insert in which the act that added this subdivision takes effect end insert , the
directors of the department and other state agencies may count
towards that goal, contracts with firms that would be considered
a small business or microbusiness under the amendments made to
Section 14837 by the act adding this subdivision.

SEC. 5.  

No reimbursement is required by this act pursuant to
Section 6 of Article XIII B of the California Constitution because
the only costs that may be incurred by a local agency or school
district will be incurred because this act creates a new crime or
infraction, eliminates a crime or infraction, or changes the penalty
for a crime or infraction, within the meaning of Section 17556 of
the Government Code, or changes the definition of a crime within
the meaning of Section 6 of Article XIII B of the California
Constitution.