Research Administration Office

University of California

Memo Operating Guidance

No. 83-23

July 18, 1983

Subject: State of California Contact Approval

California Government Code Section 14780 stipulates that contracts entered into by State agencies (1) are not effective unless and until approved by the Department of General Services and (2) shall be effective from the date of such approval (see Enclosure 1). These requirements are also incorporated into State Administration Manual, Section 1203 (see Enclosure 2).

This Government Code Section has always been understood to mean that a contract is not effective prior to DGS approval. However, the Code can be interpreted in two ways. The liberal view is that DGS may approve a contract which provides for the payment of costs incurred prior to the date of DGS approval (this was usually accomplished by backdating the performance start dates of the contracts). The conservative view is that no costs incurred prior to the date of DGS approval will be paid under the contract. In the past, DGS and most State agencies have taken the liberal view.

Since the recent re-enactment of Section 14780 into the statutes (via Assembly Bill 3335 approved by the Governor on September 21, 1982), department of General Services Chief Counsel Emil Relat has informally indicated that DGS will begin interpreting the Code section conservatively. This means that pre-contract costs are not likely to be recognized as reimbursable under the contract. This creates the severe problem of potential breaks in project continuity between two contracts if the succeeding contract does not take effect immediately upon expiration of the prior contract.

According to Relat's office, the effective date of contracts under Section 14780 is being implemented as follows:

(1) The contract start date is the date of performance stated in the contract, if the contract is approved by DGS prior to the performance start date.

(2) If the contract is approved by DGS after the performance date stated in the contract, the start date is the date of DGS approval.

(However, please note that some contracts--such as those with the Air Resources Board--do not include performance start dates, but instead utilize the date of DGS approval, with the contract running for a certain number of months from that execution date.)

Since contracts are not effective until approved by DGS, under the new conservative interpretation we expect that only those costs incurred subsequent to the DGS approval dates of the contracts are payable. This

creates great difficulty for the University with the above-mentioned "continuation" contracts that are not executed before the prior contracts end, resulting in funding gaps that may or may not be covered by the State. Although the State considers each contract to be a new contract, in reality many may be continuation contracts that utilize the same Principal Investigator and staff and provide the same services or extend the research from the expiring contracts to the new contracts. The question then is, should costs be incurred to maintain continuity of projects?

In the past, the State Controller' s Office has been lenient with U.C. contracts in paying costs incurred prior to DGS approval to maintain project continuity. However, we do not know what its policy will actually be now that Section 14780 is being conservatively interpreted. We are currently trying to obtain an opinion from the legal staff of the Controller's Office as to whether payment of retroactive costs will continue, and will let you know their response when it is forthcoming.

Some State agencies have stated that the problem with late execution of contracts, resulting in lack of continuity between contracts and creating funding gaps, should no longer occur, and that contracts will be executed on a timely basis since the Department of Finance is no longer required to review contracts (see Enclosure 3). Supposedly, this will reduce the time for State approval of contracts. This remains to be proven by the State, but any effort to reduce steps in the approval process should ensure more timely execution of contracts.

In order for the University to best deal with the foregoing problems, we suggest the following:

(1) Do not begin performance or advance funds under the contract until a fully executed contract has been received. Make this point in all proposals to the State, and to the Principal Investigators so that the PI's can pressure the State program administrators to process the contracts on time.

(2) Again, although the State technically treats all contracts as being new contracts, if it appears that a "continuation" contract is not likely to be executed before the previous contract ends, attempt to obtain a no cost extension of the expiring contract to cover the potential gap period, if the budget for the expiring contract has not yet been exceeded. Until we are informed otherwise by the Controller' s Office, we must assume that the State will not pay costs incurred beyond the contract limit. Please note that DGS approval for the extension must be obtained if the original contract required DGS ' approval.

(3) Identify those contracts that are to be "continued" and submit the proposals on a timely basis. This means at least four months prior to the ending date of the expiring contract. Allocate more time if, from past experience, the State agency is one which has difficult contract terms that require lengthy negotiation.

(4) If the expiring contract requires a draft final report, make sure the Principal Investigator is aware of the requirement and submits the report on time. Many State agencies have complained that the University is the worst offender in not submitting reports when required. The importance of a draft final report, which typically is required to be submitted to the State agency several months prior to the end of the contract period, is that the State agency bases its approval of proposals to continue the work or services of expiring contracts on the findings presented in the draft final report. Therefore, the ability of the agency to review a draft final report containing the work accomplished under an expiring contract, in order to make decisions to continue the work, is of critical importance. Thus, the importance of submitting both proposals and draft final reports with plenty of lead time cannot be overemphasized.

(5) Closely monitor and follow up with State agencies to ensure that contracts are being prepared and processed through the State in a timely manner.

(6) Streamline your internal contract approval process so that you reduce the time for U.C. approval of contracts as much as possible. The State Department of Agriculture has remarked that part of the delay in the past in executing contracts was due to the University taking an inordinate amount of time to review and sign off on contracts. A State study was cited that indicated the University takes an average of 30-40 days to approve contracts. If, in fact, the University has been part of the problem in delaying contracts, our contribution towards alleviating the problem should be to streamline our own contract approval system.

(7) Utilize interagency agreements with State agencies. Interagencies are easier to get through DGS for approval.

Since we are uncertain at this point as to whether the State will cover costs incurred during funding gaps, we should do everything possible to avoid the creation of those gaps in the first place.

We will inform you immediately when we hear from the State Controller's Office as to how it intends to handle costs incurred during such gap periods.

Mona Litrownik

ATSS 8-582-1654

(415) 642-1654

Subject Index: 02, 06

Organization Index: S-001

David F. Mears

University Contracts and Grants Coordinator


Enclosure 1

Section 14780. Approval of contracts; application of section; exceptions

All contracts entered into by any state agency for (a) the hiring or purchase of equipment, supplies, materials, or of textbooks for use in the day and evening elementary schools of the state, (b) services, whether or not the same involve the furnishing or use of equipment, material or supplies or are performed by an independent contractor, (c) the construction, alteration, improvement repair or maintenance of property, real or personal, or (d) the performance of work or services by such state agency for or in cooperation with any person, or public body, are of no effect unless and until approved by the Department of General Services. Every such contract shall be transmitted with all papers, estimates, and recommendations concerning it to the department and, if approved by the department, shall be effective from the date of such approval. This section shall apply to any state agency which by general or specific statute is expressly or impliedly authorized to enter into transactions referred to herein. This section shall not apply to any contract let by a department under the State Contract Act or the State College Contract Law, nor to any contract of a type specifically mentioned and authorized to be entered into by

the Department of Transportation under the Streets and Highways Code, nor any contract entered into by the Department of. Transportation which is not funded by money derived by state tax sources but, rather, is funded by money derived from federal or local tax sources, nor to any contract let by the Legislature, nor to any contract entered into under the authority of Chapter 4 (commencing with Section 11770) of Part 3 of Division 2 of the Insurance Code.


Enclosure 2

STATE ADMINISTRATIVE MANUAL, CONTRACTS

AUTHORITY (Revised 12/82)

1203

Sections 13070 and 14615 of the Government Code vest in the Department of Finance and the Department of General Services, respectively, general powers of supervision over matters concerning the financial and business policies of the State and provide that the Department of Finance or Department of General Services may institute investigations and procedures . deemed proper to conserve the rights and interests of the State. This power has been construed by the courts of this State to place the responsibility in the departments to conserve the financial interests of the State, to prevent so far as possible any improvident contracts by the entities of the State, and to avoid improvident expenditures.

Government Code Section 14780 provides that contracts shall be transmitted with all papers, estimates, and recommendations concerning them to the Department of General Services, and if approved, shall be effective from the date of such approval.


Enclosure 3

Management Memo and Transmittal Letter

State Administrative Manual

No. 82-32 (12/20/82)

On January 1, 1983, two significant pieces of legislation which will impact the manner in which agencies conduct their business in contractual matters, will go into effect. These bills are SB 1398 (Presley), Chapter 1208 of the 1982 Statutes, pertaining to consultant contracts, and secondly, AB 3335 (Moorhead), Chapter 1207 of the 1982 statutes pertaining to contracts for services.

Attached is a comprehensive revision of the 1200 Chapter of the State Administrative Manual which reflects the above mentioned statutes and the modification in the State's contracting requirements, resulting in various notable changes as follows.

The Department of General Services will have the primary responsibility for the review of contracts, largely eliminating the reviews by the Department of Finance and the State Personnel Board. The requirements and standards for competitive bidding, requests for proposals, and sole source have been more clearly delineated, and a structured protest procedure has been made available. Also various contract related forms have been modified, a system of contractor identification numbers will be utilized and provisions pertaining to contracting with State officers and employees are set forth. It is also important to note that while many procedures remain unchanged, several procedures, including those described above, are now requirements of law and are no longer subject to policy exception.

Lastly, agencies should be aware that all previously granted contract exemptions will remain in effect pursuant to their terms. If there are questions regarding these changes, inquiry should be made of the Legal Office, Department of General Services at 445-4084 or (ATSS) 485-4084.

David E. Jansen, Director

Department of General Services

Mary Ann Graves, Director

Department of Finance