California state law grants local, independently owned, small businesses a 5 percent preference when competing for state contracts. The law also sets for state agencies a goal of making at least 25 percent of their purchases with small businesses.
To be certified to receive the preference, a business:
- must be independently owned and operated;
- cannot be dominant in its field of operation;
- must have its principal office located in California;
- must have its owners domiciled in California; and
- together with its affiliates, be either:
- a business with 100 or fewer employees and average annual gross receipts of $10 million or less over the previous three years, or
- a manufacturer with 100 or fewer employees.
The law gives certified small businesses a few additional benefits when doing business with the state. They are, for example, entitled to higher interest penalties than non-small business if the state is late paying an invoice. State agencies may also use a streamlined process for contracts of less than $250,000 under which they may contract directly with a small business after receiving bids from two small businesses.
Non-small business bidders may also receive a preference if they subcontract at least 25 percent of the work to local small businesses. However, small businesses always take precedence over these bidders in the awarding of contracts.
State agencies must report to the governor and legislature each year on whether they achieved the 25 percent local small business purchasing goal. State agencies that fail to meet the goal must explain the reasons why, and show plans for how they intend to meet the goal in the future. In 2006-07, state agencies awarded 28 percent of the total value of their purchasing contracts to certified small businesses.
A 2009 study from California State University at Sacramento, for example, found that the State of California generated approximately $4.2 billion in additional economic activity and 26,000 new jobs between 2006 and 2007 by contracting with disabled veteran-owned businesses and local small businesses instead of larger companies.
The Economic Impact of the Small Business and Disabled Veteran Business Enterprise Programs on the State of California
This June 2009 study, conducted by Dr. Sanjay B. Varshney and Dr. Dennis H. Tootelian of California State University, analyzes the economic, job, and tax benefits of the state’s small business purchasing preference.