Early Learning and Care Division
Subject: Standards for Competitive Procurement of Equipment and Services with Public Funds
Number: 13-05
Date: March 2013
Expires: When Rescinded
Authority: 45 Code of Federal Regulations (45 CFR), Part 74, sections 74.40–74.48, and Part 92, Section 92.36, the California Code of Regulations, Title 5 (5 CCR) sections 18027–18030, and 18040.
Attention: Executive Officers, Financial Officers, and Board Members of all Contractors
Purpose
The purpose of this Management Bulletin (MB) is to summarize federal and state standards for competitive procurement of goods and services utilizing public funds.
Authority
45 Code of Federal Regulations (45 CFR), Part 74, sections 74.40–74.48, and Part 92, Section 92.36, the California Code of Regulations, Title 5 (5 CCR) sections 18027–18030, and 18040.
Policy
5 CCR Section 18033 states that contractors will be reimbursed for actual costs that are reasonable and necessary to the performance of the contract. “Reasonable and necessary costs” are defined as those that do not exceed what an ordinarily prudent person would incur to perform the duties specified in the contract.
Through this MB we are requesting that executive officers, financial officers, and board members of organizations contracting with the California Department of Education (CDE) for child care and development services become familiar with requirements regarding competitive procurement. Furthermore, Board of Directors in organizations contracting with CDE for child care and development services are responsible for the oversight of contractor operations, which includes the development and enforcement of policies that are consistent with federal and state requirements.
To ensure that costs are reimbursable, contractors must have written policies and procedures—and must implement those policies and procedures—to avoid conflicts of interest, including related party transactions, and to ensure that the price for goods and services is the competitive market price. All procurements must be supported by documentation that verifies compliance with state and federal rules.
The federal regulations above contain descriptions of policies and procedures that contractors must implement to ensure that procurements are necessary, obtained through a full and open competition, free of organizational conflicts of interest, and other non-competitive practices. 45 CFR Section 92.36(b)(3) contains a description of conflicts of interest, and prohibits any conflict of interest, whether “real or apparent.”Consistent with federal rules, state regulations require that contractors solicit and receive three competitive bids to acquire equipment or services (including certain subcontracts) in excess of $5,000. 45 CFR sections 98.36(d)(1) and (d)(3)(ii) require that “[p]roposals must be solicited from an adequate number of qualified sources.” 45 CFR Section 92.36(b)(8) requires that “Grantees and sub-grantees will make awards only to responsible contractors possessing the ability to perform successfully.” Generally, bids must be obtained from at least three qualified bidders capable of providing the product or services described in the bid, and each bid must contain prices for equivalent and comparable items and/or services.
Subdividing a contract into separate items, each with a value of under $5,000, to avoid the competitive bidding requirement is prohibited. This applies to any work, project, service or purchase, all of which are considered subcontracts. For example, see Public Contract Code sections 20116 and 20657, which state, "It shall be unlawful to split or separate into smaller work orders or projects any work, project, service or purchase for the purpose of evading the provisions of this article requiring contracting after competitive bidding.” Federal rules require grantees to consider consolidating procurements to obtain a more economical purchase. The entire amount of any transaction which involves sub-dividing purchases to avoid competitive procurement could be disallowed and could result in a finding of noncompliance that would be considered when evaluating the status of the contract. The contractor bears the burden of proof in establishing compliance with these requirements and should retain complete documentation of the procurement process.
Exceptions
5 CCR Section 18026, lists a number of exceptions to the competitive bidding requirements described above. Among those exceptions are “employment agreements.” While the regulations do not define the term “employment agreements,” its ordinary meaning is limited to an agreement between an employee and an employer setting forth the terms and conditions of the employment1. A consulting contract or a contract with an employment agency to provide temporary help, personnel, or human resources services to the organization is not an employment agreement and, therefore, must be competitively bid. Even though employment agreements are exempted from the competitive bidding process, they are not exempted from the requirement that costs incurred in such contracts be reasonable and necessary to the operation of the contract. Therefore, compensation, benefits, and other expenses incurred for the benefit of executives and other employees under employment agreements are subject to disallowance to the extent they don’t meet such standards.
Subcontracts for child care and development services provided directly to children (direct services subcontracts) are not specifically exempted from the competitive procurement process. However, because direct services subcontractors provide educational services to children, contractors should consider the quality of a potential subcontractor’s educational services, and their ability to meet other program requirements when selecting direct services subcontractors.
Subcontracts for administrative functions, such as information technology, financial management, accounting, record-keeping, or human resources, are not direct services subcontracts. Contracts for administrative functions, in any combination, are subject to federal requirements regarding competitive procurement and state requirements in 5 CCR sections 18027–18030, and 18040. The costs of administrative services contracts must be reasonable and necessary to the operation of the child care and development program.
Finally, please be reminded that direct services subcontracts and administrative or management subcontracts must be audited in accordance with the Department’s audit guidelines.
Directive
Executive officers, financial officers, and board members of child care and development contractors should immediately:
- Become familiar with federal and state requirements dealing with competitive procurement. Where officers or board members are unfamiliar with the requirements, training should be arranged, and a process should be developed to educate new officers and board members of the contractor as needed.
- Adopt and implement written policies and procedures necessary to carry out the provisions of federal and state rules where such policies and procedures may be lacking or insufficient.
- Institute a system for responsible oversight of the procurement process, ensuring that federal and state requirements are met, including regular reporting to, and oversight by board members or a subcommittee of the Board.
Given recent issues in regards to competitive procurement, please be advised that verification of the above directive may be included in Early Education and Support Division reviews or Child Development Fiscal Services’ reviews.
Questions regarding the information in this MB should be addressed to your Field Services Consultant at http://www.cde.ca.gov/sp/cd/ci/assignments.asp or by phone at 916-322-6233.
This Management Bulletin is mandatory only to the extent that it cites a specific statutory and/or regulatory requirement. Any portion of this Management Bulletin that is not supported by a specific statutory and/or regulatory requirement is not prescriptive pursuant to California Education Code Section 33308.5.
1Blacks Dictionary Online defines it as: “Agreement between an employer and an employee. It is typically voluntary, deliberate, and legally enforceable, therefore, binding. The employee must agree to this contract as a condition of his/her employment. Employment contracts cover a variety of procedures and/or policies that are required for the employer to protect its own interest. The contract often states a timeframe inhibiting the employee after they leave the company, from working for a competitor or in a similar industry. This section is often contested in the courts.”