Diverse Procurement Opportunities for Women- and Minority-Owned Businesses

Equal Protection Clause and Prop 209

In March of 1998, the Ninth Circuit Court of Appeals determined in Monterey Mechanical Co. v. Wilson that the provisions of Public Contract Code Section 10115 et seq., which include the statutory requirements to achieve minority and women business enterprise procurement participation goals or related good faith efforts were unconstitutional and violate the Equal Protection Clause of the Fourteenth Amendment of the US Constitution. 

Article 1 of the Fourteenth Amendment states, “All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the state wherein they reside.  No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.”

The central issues being evaluated were whether the mandate to classify certain contractors differently, according to their ethnicity and sex, violated the equal protection clause or had the state constructed “a narrowly tailored remedy to account for past discrimination."  Upon reviewing the legislative intent of the women and minority business contracting statute, the court stated in the Monterey Mechanical case that California had “made no attempt to justify the ethnic and sex discrimination it imposed.”

Prior to the Monterey Mechanical decision (1996), California voters had passed Proposition 209 (Prop 209), which more comprehensively blocked the state’s ability to operate women and minority procurement programs.  Under Prop 209, which added Section 31 to Article 1 of the California Constitution, the “state is prohibited from discriminating against, or granting preferential treatment to, any individual or group on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education or public contracting".

As a result of these two cases, Governor Wilson issued Executive Order W-172-98, which stated, in part, that every state department was to cease any enforcement of the minority and women business enterprise participation goals or any related good faith effort requirements associated with Public Contract Code Section 10115 et seq. with respect to any non-federally funded state contracts or amendments on or after March 10, 1998.   

Procurement Opportunities with the State

California has a 40-year history of utilizing state contracting to support business development within targeted business populations.  Statute sets an annual 3% DVBE procurement participation goal, and a 2006 executive order sets a 25% small businesses and microbusinesses participation goal for state agencies, departments, boards, and commissions.

While encouraging small business participation furthers the state’s interest in having a robust small business sector, the Small Business Procurement and Contract Act also establishes the policy foundation for DVBE contract participation.  The DVBE procurement program is intended to both recognize the sacrifices of California’s disabled military veterans, as well as address the specific needs of disabled veterans seeking rehabilitation and training through entrepreneurship.

To assist state agencies in reaching these targeted procurement participation goals, state law authorizes a procurement preference for bids using a certified small business as a prime or subcontractor and a streamlined alternative procurement process for smaller size contracts (between $5,000 and $250,000) whereby an awarding department can contract directly with a certified small business or DVBE after comparing the bid against two other similar businesses. 

The state also administers a DVBE incentive that allows an awarding department to set an incentive percentage for a particular transaction based upon the department’s business strategy to achieve their annual 3% DVBE procurement participation goal.  Awarding departments are also required to recognize a 5% preference in cases where a bid includes a certified small business.

In the state’s experience, a majority of DVBEs are smaller size firms, with 75.4% having dual certifications as a DVBE and microbusiness, and 9.6% having dual certifications as a DVBE and small business.  The remaining 15% of DVBEs operate with only a single DVBE certification. 

Given the importance of small businesses to California's economy, these procurement preferences play a key role in distributing state expenditures throughout the state and among a variety of business types.  The charts below (Charts 1 and 2) display small business and DVBE procurement participation for the most recent four fiscal years for which data is available.

Based on the data displayed above, the state appears to have consistently met its 25% small business (except in 2018-19) and 3% DVBE procurement participation goals.  This is, however, only part of a program assessment, and these numbers may be misleading.  Although DGS works diligently to gather and aggregate this information, the data is not consistently reported by state agencies, nor do all of the agencies report annually.  As an example, in 2012-13, only 79% of the mandatory reporting entities reported their contracting activity to DGS.

The data is further compromised by the lack of follow-up by awarding departments to ensure that small business and DVBE procurement participation commitments have been kept or that these subcontractors were paid.  A state audit of the DVBE Program, released in 2019, suggests that very few state agencies have implemented practices to monitor and report DVBE procurement participation violations for follow-up by DGS.

Procurement Opportunities with Investor-Owned Utilities

Beginning in 1986, the Legislature enacted a series of statutes, and the CPUC adopted General Order (GO) 156, for the purpose of encouraging greater diverse business participation in utility contracts.  Currently, utilities that are mandated to participate in GO 156 include electrical, gas, water, wireless telecommunications service providers, and telephone corporations with gross annual revenues over $25 million, including commission-regulated subsidiaries and affiliates.  

Statute and GO 156 include rules and regulations for the utilities' compliance with the Supplier Diversity contracting program, and require participating utilities to inform, recruit, and work toward having at least 21.5% of their procurement activities over a five-year period be with business enterprises primarily owned and operated by women, members of racial or ethnic minorities, disabled individuals, and veterans.  More specifically, the targets are 15% for minority-owned businesses, 5% for women-owned businesses, and 1.5% for DVBEs. 

The CPUC has not yet set a minimum procurement participation target for LGBT-owned business enterprises.  GO 156 states that during the first five years of implementation, the utilities are excused from setting numerically-based goals and, instead, the utilities should focus their efforts on updating their supplier diversity policies, developing targeted outreach programs, and ensuring LGBT business entities are aware of available technical assistance, among other actions.

In order for the procurement activities to count toward supplier diversity goals, a woman-, minority-, or LGBT-owned business enterprise has to become certified through an entity recognized by the CPUC’s Utility Diversity Supplier Program clearinghouse.  These third-party certifications generally cost business owners money.  Businesses owned and operated by disabled veterans use the free DGS certification process established under the California DVBE Program.   

As of August 15, 2021, the Clearinghouse database has a total of 10,124 verified diverse vendors, including:

• 3,699 women business enterprises

• 3,925 minority business enterprises

• 1,232 minority women-owned or woman and minority male-owned businesses

• 2,052 DVBEs

• 366 LGBT-business enterprises (up from 110 in 2017)

• 37 Small Business Administration 8(a) certified businesses

Regulated entities are also required to annually submit a detailed and verifiable plan, with goals and timetables, for increasing diverse business participation in all categories of procurement, including technology, equipment, supplies, services, materials, and construction.  Although there is no penalty for failure of a utility to meet the goals, each utility is required to report annually on its progress.  The CPUC, in turn, is required to make an annual progress report to the Legislature.

In 2019, as reported in the September 2020 annual report, investor-owned utilities expended $12.32 billion in contracts with diverse suppliers, which represented a 2.3% increase over 2018 contracting.  The utilities spent 33.18% of their total procurement outlay with diverse suppliers, exceeding the GO 156 overall 21.5% WMDVLGBTBE goal.  More specifically, the utilities expended the following in 2019:

• Minority Business Enterprise (MBE)

  • GO 156 Goal of 15% of annual expenditures

  • 0.19% decrease in 2019, from $8.5 billion to $8.49 billion

  • 22.24% of their total procurement from MBEs

• Women Business Enterprise (WBE)

  • GO 156 Goal 5% of annual expenditures

  • 9.34% increase in 2019, from $3.2 billion to $3.5 billion

  • 9.17% of their total expenditures from WBEs

• DVBE

  • GO 156 Goal of 1.5% of annual expenditures

  • 7.15% increase in 2019, from from $571 million to $612 million

  • 1.6% of their total expenditures from DVBEs

• Lesbian, gay, bisexual, and/or transgender (LGBT)-owned business enterprises (LGBTBE)

  • GO 156 does not currently have a LGBTBE goal.  State law allows the CPUC to track LGBTBE expenditures for the purpose of setting a goal for use in 2021, AB 1678, Chapter 633, Statutes of 2014

  • 64.04% increase in 2019, from $38.77 million to $63.59 million

  • 0.17% of total expenditures in 2019, an increase from 0.11% in 2018

According to the report, indirect expenditures (subcontracting) with WMDVLGBTBE firms through prime contractors decreased by 0.68% for a total of 5.6% of expenditures or $2.21 billion in 2019.

Procurement Opportunities during COVID-19

Procurement reporting for the period of the COVID-19 pandemic is difficult to track.  Being under a state of emergency allows state agencies to use alternative contracting protocols.  Many small business groups have expressed concern over the lack of access to new procurement opportunities. 

There is good evidence that small business and DVBE participation in 2019-20 and 2020-21 state procurement will not meet the 25% and possibly the 3% goal.  DGS reported in its most recent report that the “primary reason departments gave for not meeting the SB or DVBE participation goals was the large number of emergency contracts related to the wildfires, such as the Camp Fire.”

Small businesses and DVBEs have tried to address this challenge and have made recommendations to the DGS Small Business and DVBE Advisory Committee.  One of the ad hoc working groups that formed developed a set of three recommendations, which were later shared with the Assembly Jobs Committee.  These recommendations include the following:  

• Recommendation # 1 – Increase pre-bid prime engagement with new SB and DVBE partners.  BART currently mandates online speed dating as part of their procurement process.

• Recommendation # 2 – Expand state outreach activities to include industry-specific events.

• Recommendation # 3 – Host online meet-and-greets between state agencies and groups of small business vendors.  Establish a State Mentor/Protégé program, similar to the program offered through the federal government.

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