BILL ANALYSIS
SB 1249
Page 1
Date of Hearing: June 22, 2010
ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER
PROTECTION
Mary Hayashi, Chair
SB 1249 (Ducheny) - As Amended: June 1, 2010
SENATE VOTE : 23-12
SUBJECT : Contracting by state agencies: best value competitive
bid contracts.
SUMMARY : Permits competitive bid contracts for construction
projects, goods, services, information technology, including the
California State University, to be awarded as "best value
competitive bid contracts" that consider the total direct and
indirect economic value to the state. Specifically, this bill :
1)Defines "best value competitive bid contract" to mean a
contract that is awarded on a competitive process that is not
based merely on the lowest direct cost to the state, but
rather the overall best value to the state after consideration
of the total direct and indirect economic benefit to the
state, including but not limited to, the following:
a) Direct cost of the contract, including, but not limited
to, materials, goods, and services; and,
b) Indirect value to the state generated by the contract,
including, but not limited to, an analysis of the proposed
contract to determine all of the following:
i) Total projected indirect revenue to the state
generated by the wages that the contractor and
subcontractors, if any, propose to pay their workers in
performing under the contract;
ii) Total projected indirect revenue to local
governments generated by the wages that the contractor
and subcontractors, if any, propose to pay their workers
in performing under the contract and the indirect revenue
to the state generated thereby;
iii) Total projected indirect revenue to the state
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generated from the goods and materials that the
contractor and subcontractors, if any, propose to
purchase or provide in performing under the contract;
iv) Total projected indirect revenue to California local
governments generated by the goods and materials that the
contractor and subcontractors, if any, propose to
purchase or deliver in performing under the contract and
the indirect revenue to the state generated thereby; and,
v) Indirect economic benefit to the state generated by
the economic activity related to the production of the
goods and materials to be purchased or delivered under
the contract.
2)Requires state agencies to consider, to the extent not
prohibited under federal law, the location where wages are to
be paid and where the products or materials are to be
manufactured or produced, when determining the overall
economic benefit to the state of a proposed contract pursuant
to this bill.
3)Requires the Department of General Services (DGS) to adopt
regulations that shall take effect immediately and are exempt
from the rulemaking provisions of the Administrative Procedure
Act (APA) to provide guidance to state agencies on best
methods and practices and a related matrix to assist those
agencies in determining the overall best value.
4)Prohibits a contract from being awarded to a bidder if the
Director of DGS determines that the award of the contract to
that bidder would result in a net loss of revenues to the
General Fund (GF) based on estimates of the total direct and
indirect economic benefit to the state under the contract.
5)States legislative intent.
EXISTING LAW :
1)Governs contracting between state agencies and private
contractors, sets forth requirements for the bidding,
awarding, and overseeing of contracts for construction
projects, and regulates the awarding of contracts for the
purchase of goods and services.
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2)Establishes various programs and preferences in public
contract law designed to serve a broad public purpose, such as
preference for small businesses, disabled veteran business
enterprises (DVBE) and recycled products. Existing law
designates DGS to administer the Small Business Procurement
and Contract Act, including, but not limited to, small
business, microbusinesses and DVBE certification processes.
3)Requires, for contracts to be awarded to the lowest
responsible bidder, that the awarding department shall
consider the efforts of a bidder to meet minority business
enterprise, women business enterprise, and DVBE goals.
4)Establishes the APA, setting forth the requirements for the
adoption, publication, review, and implementation of
regulations by state agencies.
5)Defines "value-effective acquisition" of contracts to mean the
following:
a) The operational cost that the state would incur if the
bid or proposal is accepted;
b) Quality of the product or service, or its technical
competency;
c) Reliability of delivery and implementation schedules;
d) The maximum facilitation of data exchange and systems
integration;
e) Warranties, guarantees, and return policy;
f) Supplier financial stability;
g) Consistency of the proposed solution with the state's
planning documents and announced strategic program
direction;
h) Quality and effectiveness of business solution and
approach;
i) Industry and program experience;
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j) Prior record of supplier performance;
aa) Supplier expertise with engagements of similar scope and
complexity;
bb) Extent and quality of the proposed participation and
acceptance by all user groups;
cc) Proven development methodologies and tools; and,
dd) Innovative use of current technologies and quality
results.
FISCAL EFFECT : Unknown
COMMENTS :
Purpose of this bill . According to the author's office, "In
current bid contracting and procurement processes, the benefit
to California in revenue and benefits derived from contracting
California employees and using California products is currently
not factored in. Such uncalculated benefits include the tax
benefit to state and local governments from employing California
residents and the personal income tax and sales and use tax
collected from the wages of these contracted jobs. This bill
requires the calculations of the actual cost of any contract the
state enters into to factor in both direct and indirect economic
benefits to the state."
Background . DGS oversees public contracts and the procurement
of goods and services on behalf of state agencies. Generally,
state contracts for goods, services, or materials are secured
through the competitive bid process, and awarded based on lowest
responsible bidder, best value, or other criteria. The formal
competitive bidding process requires advertisement of contracts
put out to bid, a period for the solicitation of bid proposals,
a bid opening, and bid evaluations prior to awarding a contract.
The objective of the competitive bid process is to allow the
state to procure contracts for goods, services, and materials at
the lowest dollar amount possible to achieve the greatest cost
savings, unless other considerations, such as quality, delivery
date, warranties, and prior performance, justify awarding a
contract to someone other than the lowest bidder. Existing law
already provides for alternative contract determinations,
including best value and value-effective acquisition, which
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allow the award of contracts to be based on value and not
restricted to lowest cost to the state.
The State Contract and Procurement Registration System tracks
overall total contracting dollars procured by the state. For
the period of January 1 to June 10, 2010, there were 57,227
contracts recorded and subsequently, a significantly higher
number of bid proposals were received by DGS for each contract.
Based on these figures, this bill would substantially increase
DGS' workload by requiring staff to produce a cost-benefit
analysis of every bid proposal received. The brevity of the
analysis would include the assessment of the indirect and direct
economic benefits to the state, the wages of every employee
hired by a contractor or subcontractor, the state personal
income taxes generated by employee wages, the location of where
the wages are to be paid, the location of where products and
materials are manufactured and produced, and the state and local
sales tax revenues resulting from the purchase of goods and
materials. DGS could potentially receive tens of thousands to
hundreds of thousands of bid proposals spanning a six-month
cycle. This increased workload arising from the bill
requirement to assess both direct and indirect economic benefits
would delay the bid evaluation and the award of a contract. In
addition, redefining the term "value" in a bid proposal or
contract to include indirect costs (in addition to direct costs)
can be challenging for DGS staff to interpret, assess and
account for, thereby increasing the number of bid protests and
legal challenges over awarded contracts.
This bill, as written, may not provide a better value to the
state. For example, this bill defines a "best value competitive
bid contract" to consider higher employee wages, income taxes,
and sales taxes as adding value to the state. Yet, this
assessment increases the costs the state will have to pay for a
contract. Using this definition, the highest bidder can inflate
contract costs and win a contract by spending the most on
employees, goods, and materials.
This bill's objective to award a "best value competitive bid
contract" is nullified by a conflicting bill provision
prohibiting DGS from awarding a contract that results in a net
loss of revenues to the GF, based on estimates of total direct
and indirect economic benefits. The net effect of this bill is
zero.
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This bill requires DGS to adopt regulations outside the normal
transparency requirements that include solicitation of public
input on proposed regulations (and an economic impact
assessment), a public hearing, and a 90-day waiting period
following the adoption of a regulation prior to implementation.
DGS would be able to bypass those requirements under this bill.
Opposition . According to the Department of Finance, this bill
"could result in potentially significant impact to the state.
In addition, the economic modeling (called dynamic modeling)
that would be necessary to evaluate the indirect economic
benefits outlined in this bill would be costly and could result
in legal challenges as the data cannot be easily validated and
is subject to interpretation. Finally, it is unclear that DGS
has the needed expertise to develop the matrix to be used for
this information and most of the affected state agencies would
have limited staff expertise to assess the indirect fiscal
benefits."
According to the Associated Builders and Contractors (ABC) of
California, "This bill's best value model allows public entities
to consider factors other than cost when awarding contracts.
This bill also exempts the proposed 'best value' contracting
process from the formal rulemaking process required under the
APA and instead permits DGS to implement the bill's provisions
minus public input. As a result, ABC believes this bill's
provisions will inject a high level of subjectivity into a
public agency contract decision-making process."
According to the California Chamber of Commerce, "No government
agency should be allowed to sacrifice the highest level of
security in an information technology system just because one
vendor would pay higher wages to its employees. No one should
be asked to weigh the benefit of a building with the highest
structural integrity against the benefit of where the employees
who build it would be from. Yet this bill opens up the
possibility that government entities will feel compelled to make
these comparisons, and as a result, Californians may receive
inferior products and services that pose serious safety and
security risks."
Related Legislation . SB 967 (Correa) of 2010 requires, on or
before July 1, 2011, that a five percent bid preference be
provided on state contracts for goods and services, including
bids or proposals for the distribution of funds pursuant to the
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federal American Recovery and Reinvestment Act of 2009, to
contractors who substantiate that 90% of their employees
performing work on the contract are California residents. This
bill is pending in the Assembly Business, Professions and
Consumer Protection Committee.
Double-referred . This bill is double-referred to Assembly Jobs,
Economic Development, and the Economy Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file.
Opposition
Associated Builders and Contractors of California
California Chamber of Commerce
Department of Finance
Seawright Custom Precast, Inc.
Analysis Prepared by : Joanna Gin / B.,P. & C.P. / (916)
319-3301