Tuesday, February 8, 2011

In-State Bidding Preferences on the Rise

As the economy continues its slow recovery and small businesses struggle financially, many states and local governments are turning to tools designed to protect their own local businesses by offering them financial incentives in the public bidding process, over firms from out of state.

The Disadvantages of Bidding Preferences:  While the intent of such moves is understandable, there are often unintended and detrimental consequences to such preference programs:
  • Reciprocity:  Let's say that Washington State established bidding preference for Washington State firms (and it's under consideration now).  Other states may then choose to establish a preference for their in-state bidders over Washington State bidders.  Often, these types of requirements can be detrimental to businesses trying to do business in other states where they are at a competitive disadvantage.  The end result is that it may hurt local businesses, who end up with less income, and thus pay fewer taxes to already financially strapped government agencies.
  • Certification:  With the award of a contract actually riding on whether a firm is defined as being an in-state business, it becomes very important and difficult to define which businesses actually qualify for the preference points.  It requires setting up new government bureaucracies to monitor and certify what businesses actually qualify for the preference points, at a cost to governments that are cutting their most basic services to balance budgets.
  • Higher Costs:  Local preference programs often result in higher costs to government agencies.  While government is trying to help its own local businesses, they end up at the same time of paying higher prices.  For example, if an agency had a 5% preference program for local or in-state businesses, a low bid of $100,000 wouldn't be awarded the contract if an in-state or local business had a bid of $105,000 or less.  Thus, in this example, an agency could end up paying up to $5,000 more on work really valued at $100,000, something that most public agencies these days cannot afford to pay.  This becomes a situation of governmental budgets subsidizing local businesses, which may be viewed as a gift of public money to a private entity, something prohibited in many jurisdictions.
The Bottom Line:  Bidding preference programs impact the budgets of government agencies by lower taxes, increased cost to manage certification programs, and paying prices higher than the low bid.

New Washington State Legislation:  House Bill 1809 (Companion Senate Bill 5662) has recently been introduced into the Washington State Legislature.  This is in addition to the previous bill (HB 1355) that I reported on earlier that would establish a 3% preference in bidding on state agency contracts.

Resident Contractor:  Under HB 1809, which would apply to public works contracts awarded by the state or a municipality, a new term for "resident contractor" is defined.  A resident contractor must be certified by the State Department of General Adminstration and meet the following requirements:
  • Be registered as a contractor in Washington State
  • Maintain a place of business in the state staffed by the contractor or an employee of the contractor for a period of six months immediately preceding the date of the bid
  • Pay residents of the state at least 85% of its payroll, in dollar volume, or employ residents of the state for at least 85% of its employees
  • Have the owner of various business entity types be a resident of the state.
7% Preference in Award:  HB 1809 would require the state or municipality to pay up to 7% more for a public works project if a resident contractor was within 7% of the low bid.  The project would be awarded at the higher amount to the resident contractor.

Penalties and Sanctions:  The bill includes a series of penalties and sanctions for contractors who submit false information in the process of obtaining certification as a resident contractor by the Department of General Administration.  Interestingly, one of the penalties is "an assessment equal to the difference between the contract amount and what the state's cost would have been if the contract had been properly awarded."  But this penalty only appears to apply to the state and not to municipalities.  

Other States:  I'm aware of the following activity in other states:
Mike Purdy's Public Contracting Blog 
© 2011 by Michael E. Purdy Associates, LLC 

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