Honorable Robert Bunda

President of the Senate

Twenty-Second State Legislature

Regular Session of 2003

State of Hawaii

Sir:

Your Committee on Transportation, Military Affairs, and Government Operations, to which was referred S.B. No. 1262 entitled:

begs leave to report as follows:

The purpose of this measure is to amend various provisions of the state procurement code.

Prior to the public hearing, your Committee drafted several Proposed SD1 versions of this measure, to incorporate amendments sought by all of the parties involved, including the Administration, contractors, subcontractors, unions, and legislators.

Your Committee circulated several versions of the Proposed SD1 to the interested parties prior to the public hearing. Since this measure contains so many unrelated amendments to the procurement code, and since there were several drafts in circulation prior to the hearing, nearly all of the testimony received by your Committee was equivocal, supporting some provisions, opposing others, and requesting amendments.

Your Committee received testimony from the Department of Accounting and General Services (DAGS), the State Procurement Office (SPO), the County of Kauai Department of Water, the American Public Works Association, the Building Industry Association of Hawaii, the Subcontractors Association of Hawaii, the Plumbing and Mechanical Contractors Association of Hawaii, the General Contractors Association of Hawaii, the Hawaii Chapter of Associated Builders and Contractors, Inc., the American Council of Engineering Companies, the Sheet Metal Contractors Association, Pacific Structural Consultants, Inc., the American Institute of Architects Hawaii State Council, Network Enterprises, Inc., the American Society of Civil Engineers, and Miyasato Kuniyoshi Engineers LLC.

Your Committee attempted to reconcile the interests of the various parties affected by this measure, and the resulting SD1 version of this measure represents a compromise between several competing interests. Your Committee has incorporated several amendments to the procurement code in this measure, which will serve as the Senate's vehicle for procurement code amendments this session.

As introduced, this measure proposed a new provision in the procurement code to assist small businesses in receiving subcontracts on state projects.

Your Committee believes that such a preference does not address the primary problem of state contracts being awarded to out-of-state contractors. Therefore, your Committee deleted the small business preference and instead amended section 103D-310, Hawaii Revised Statutes (HRS), to level the playing field between local contractors and out-of-state contractors.

Your Committee firmly believes that since state contracts are funded with public funds received from our taxpayers, local companies should be awarded state contracts whenever possible. In recent legislative sessions, your Committee has worked diligently to enact a preference for local companies employing state residents.

Your Committee's past attempts to enact a state resident preference have been rebuffed by the Attorney General's (AG) apparent belief that giving a preference for state residents is unconstitutional. Your Committee is unaware of any controlling legal precedent on point, nor has the AG ever testified before your Committee on this issue. Instead, testimony from DAGS and the SPO flatly states that such provisions are unconstitutional.

In the spirit of compromise, your Committee has amended section 103D-310, HRS, based on language recommended by DAGS, to try and give local contractors an equal shot at state contracts. As amended, all offerors on state contracts must demonstrate compliance with all State employment laws, including the general excise tax law, the disability compensation law, the employment security law, the temporary disability insurance law, and the prepaid health care law.

Apparently, in the past, out-of-state contractors were not required by DAGS to demonstrate compliance with these laws, and as a result, their bids were often lower than in-state contractors, who are required to comply with all Hawaii laws. Your Committee is hopeful that this new requirement will enable local contractors to win more contract awards.

Your Committee also included a requirement that the contractor be incorporated or organized under the laws of the State of Hawaii. Your Committee believes that the State has an important interest in ensuring that corporations, partnerships, and sole proprietors working on state projects are organized in the State, so that they can be better monitored, be more accountable, and always have on file a current agent in the State.

This measure also contains provisions to establish a Hawaii Procurement Institute at the University of Hawaii (UH), in conjunction with the William S. Richardson School of Law, to conduct procurement education, training, and research.

DAGS testified that the Institute will work within existing funds at the UH, and will also be supported by contributions from user groups such as contractors. Your Committee generally supports the concept of the Institute, but reserves final judgment until it becomes clear exactly what the Institute's duties will be, and whether it will, in fact, be self sustaining.

As introduced, this measure contained provisions to ensure that all subcontractors are listed in bids, and giving the purchasing agencies discretion to award contracts even if the low bidder omitted a subcontractor in the bid.

Based on the Hawaii Supreme Court's decision in Okada Trucking Co., Ltd. v. Board of Water Supply, 97 Haw. 450 (1/28/02), and subsequent appellate court opinions based thereon, your Committee understands that contractors are required to list subcontractors in their bids. Consequently, with the concurrence of DAGS, your Committee has deleted that section from this measure.

This measure also amends section 103D-304, HRS, relating to procurement of professional services. Specifically, this measure amends the composition of the review committee required under section 103D-304, HRS, and specifies that the review committee members' names shall be public information placed in the contract file.

This measure also amends section 103D-304, HRS, to require that an independent selection committee rank professional service providers according to specified criteria, and that the head of the purchasing agency negotiate with providers according to their ranking. Your Committee agrees with all of these amendments to ensure that professional services contracts are awarded based on professional qualifications only.

Your Committee further amended section 103D-304, HRS, to provide that design professional services, such as architect services, shall only be procured under section 103D-304, HRS, or emergency procurement procedures. Your Committee believes that the unique nature of design professional services justifies this amendment.

Your Committee also amended section 103D-304, HRS, further to require an equal distribution of work among providers that have the same qualifications. This amendment will help to ensure that all qualified professional service providers are granted state contracts.

Your Committee also amended this measure to insert a provision requiring a pre-bid conference to be held for every construction or design-build project with an estimated contract value of $100,000 or more.

Your Committee finds that many state projects are held up in order to resolve a protest by one of the unsuccessful offerors. Moreover, the number of protests has increased in recent years, which has stifled the efficiency of the procurement process. Many of these protests are difficult to resolve, because they are based on the uncertainty and ambiguity of bid requirements.

Your Committee believes that requiring a pre-bid conference for every large construction project and design-build project will enable potential bidders to have their questions answered prior to bidding, and will enable protests to be resolved quickly.

Your Committee also amended this measure to repeal section 103D-1007, HRS, the so-called state taxpayer preference. With the addition of the provisions in this measure to require all offerors to be organized under the laws of Hawaii and to comply with all applicable employment laws, your Committee finds the state taxpayer preference unnecessary.

Moreover, your Committee finds that the state taxpayer preference did not serve its purpose to assist local contractors to win construction project awards. Instead, many mainland contractors were easily able to qualify for the preference. Therefore, your Committee supports the more stringent requirements contained in this measure.

Your Committee also made several technical, nonsubstantive amendments to this measure for accuracy and clarity.

As affirmed by the record of votes of the members of your Committee on Transportation, Military Affairs, and Government Operations that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 1262, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 1262, S.D. 1, and be placed on the calendar for Third Reading.