General Services Division / Special Research & Investigation Section SUBCONTRACTING LAWS and CITY REQUIREMENTS “Okay, so there are rules. But it seems like the rules are too complicated!” (Not really. It’s just easier to break things down and look at it from a different perspective.) “What is the intent of the California Public Contract Code and the City’s requirements under the Master General Conditions?” (The intent is to protect the rights of both Prime and Subcontractors while looking after Public monies.) “Do I have to be a lawyer to run my job?” (NO. But you DO need to know some important principles when involved with Public Funds. We have some help for you here.)

General Services Division / Special Research & Investigation Section Subcontracting The BID LIST In the process of bidding for a Public Works construction project, a prime contractor is obligated to set aside a certain percentage of its proposed contract amount for subcontracting opportunities. This percentage is determined by the Awarding Authority and is specified in the project specifications and bid documents. This requirement for subcontracting a specific percentage is called the MANDATORY SUBCONTRACTING MINIMUM (“MSM” )

General Services Division / Special Research & Investigation Section Subcontracting The SEALED BID Prime’s Participation Level (Set either by Law or Awarding Authority Prime must self- perform this percentage of the work Mandatory Subcontracting Minimum (MSM) for project Part of Sealed Bid. – Prime is contractually obligated Discretion of the Prime Additional Subcontracting Opportunities Subject to specific limitations on subcontract amount, and approval of the Inspector of Public Works Here, for example, is a project with 25% of the Public Funds set aside for subcontracting out. NOTE: These figures are for demonstration only.

General Services Division / Special Research & Investigation Section Subcontracting Prime Participation Level (PPL) Public Works construction projects also require a prime to self-perform a minimum percentage of the work on their project. The Prime Participation Level (PPL) is set specifically based upon the type of contract (but excludes “specialty work”) which is determined prior to advertisement. Therefore the “PPL” can vary significantly from project to project, or from program to program. The “PPL” (set prior to bid) cannot be changed. Neither can the Prime count any of its subcontractors as its own employees.

General Services Division / Special Research & Investigation Section Subcontracting Mandatory Subcontracting Minimum – “MSM” Let’s say our sample project was awarded for a bid amount of $1,820,000; If the “MSM” was set at 25%, then the Prime is contractually obligated to list in its sealed bid, its commitment to utilize the IDENTIFIED (bid-listed) subcontractors for 25% of the contract amount; or: $ 455,000 Now note the flying piece

General Services Division / Special Research & Investigation Section Subcontracting Deduct Change Orders The Prime contractor is contractually committed to expending this portion of City funds to subcontractors listed in its sealed bid. This portion of the Prime’s bid amount is NOT THE PROPERTY OF THE PRIME. Neither the prime nor its subcontractors can unilaterally agree to reduce these amounts. A DEDUCT CHANGE ORDER from the City Engineer, changing the scope of work, is required to reduce the amount of a bid-listed subcontract. (In this example, $ 10,000) (In this example, $ 10,000) In addition, the fact that other non-bidlisted subs are receiving work makes no difference. The Prime hires those at its own option. It pays them from the remaining bid amount at its own option, but must pay the amount they were approved to perform.

General Services Division / Special Research & Investigation Section Subcontracting Remaining Contract Funds (“Fun Money”) RemainingBid Amount Remaining Bid Amount The remaining amount of the bid (in this example, 45%) is the sole property of the prime. The prime can self- perform any and all work for which it is licensed and qualified. subcontracting opportunities the subs are approved. Or, the prime can offer more subcontracting opportunities provided certain criteria are met and the subs are approved. The MOST IMPORTANT rule to remember is that NO subcontractor may be ADDED to a project if the amount of their work is greater than ½ of 1% of the total contract amount, or $ 10,000 – whichever is greater.

General Services Division / Special Research & Investigation Section Subcontracting Penalties for Non-Compliance GREAT NEWS ! ! We just saved a bunch of money !! TOTALLY COOL !! Only if you just got a great deal on your car insurance !

General Services Division / Special Research & Investigation Section Subcontracting Penalties for Non-Compliance As we have shown, once a prime contractor makes a commitment to provide subcontracting opportunities and utilize certain subcontractors for portions of the project, and specifies the amounts to be paid to them, this is part of the binding agreement between the prime and the City. If some agreements are made between the prime and the approved subs to reduce the amounts, and these agreements result in a reduction in the overall contract amount, that remainder belongs to the taxpayers. In order to balance the project books and recover the Public’s money that didn’t have to be spent on the project as a result of your savings, the City produces a cost deduction change order showing the decrease in the scope of the work. If you do not obtain one of these, and you pay your subcontractor less than it was approved for, you are subject to penalties that will be calculated by the BCA Subcontractor Outreach & Enforcement Section, and recommended to the Board of Public Works at Acceptance time.

General Services Division / Special Research & Investigation Section Subcontracting Penalties for Non-Compliance “What if I made a mistake in my estimating? If I UNDER-ESTIMATE, the City won’t pay me for that and I have to make it up out of my own pocket! Conversely, when a subcontractor discovers later that they can perform their portion of the work for less than they originally thought, I don’t get a break. Or, if I find a subcontractor after the work starts, who will do the same work for less, why can’t I keep the difference? The Prime contractor is not allowed to make a windfall profit from a reduction in the amount paid for subcontractor work. -- All bid-listed subcontractors count toward the MSM, and if the dollar value of their work is reduced it produces an unfair advantage in the bidding process. -- The prime contractor agree to build the project for the total amount of their bid, which includes any profit they expect to make. If the prime makes additional profit because it shopped around for subs to do the work cheaper after the project was bid and awarded, that money goes back to the City.

General Services Division / Special Research & Investigation Section Subcontracting Penalties for Non-Compliance Public construction contracts are awarded to the lowest Responsive, Responsible Bidder. This means that, when you do business with the public, your competitors as well as yourself are held to one set of rules. Part of getting the contract is to know the business better than the competition. They might make mistakes too, but it wouldn’t be fair to you if we showed them special treatment.

General Services Division / Special Research & Investigation Section Subcontracting Penalties for Non-Compliance BCA Subcontractor Outreach and Enforcement DURING THE PROJECT: Let BCA S R I help your over the humps when we can. We will do everything possible to keep your project on track and on schedule. This means time and money to you. For more information about the subcontracting regulations and requirements, take a look at our other SRI Tutorials! There is also additional important information under: