(a) Notwithstanding any other provision of law requiring a local agency to award contracts to the lowest responsible bidder, any local agency may do any of the following in facilitating contract awards to small businesses:

1. (1) Provide for a small business preference in construction, the procurement of goods, or the delivery of services where responsibility and quality are equal.

   The local agency shall set the percent and financial value of a preference. The maximum percentage of a preference shall be 7 percent of the lowest responsible bidder meeting specifications and the maximum financial value shall be one hundred fifty thousand dollars ($150,000) for any bid.

2. (2) Establish a subcontracting participation goal for small businesses on contracts and grant a preference, pursuant to paragraph (1), to those bidders who meet the goal.

3. (3)

   1. (A) Require bidders to make good faith efforts to meet a subcontracting participation goal for small business contracts. Bidders that fail to meet the goal established by the local agency, shall demonstrate that they made good faith efforts to meet the goal.
   2. (B) A prime contractor may, subject to the approval of the local agency, substitute a subcontractor with another small business as applicable. A local agency shall approve the substitution of a subcontractor only in the instance where the substitution meets the requirements of paragraph (6) of subdivision (d) and the local agency’s adopted policy.
4. (4) Set additional guidelines for local preference purposes.

(b)

1. (1) The local agency shall define the eligibility for a preference authorized pursuant to this section.
2. (2) In defining eligibility for a “small business,” a local agency shall, at a minimum, include businesses meeting the requirements of a small business enterprise certified pursuant to Article 1 (commencing with Section 14835) of Chapter 6.5 of Part 5.5 of Division 3 of Title 2 of the Government Code.

(c) Every local agency that offers a preference, pursuant to this section, shall, prior to offering a preference, adopt a procurement policy that includes, at a minimum, all of the following:

1. (1) A definition of an eligible entity for each preference category being utilized by the local agency.
2. (2) The percentage and maximum financial value of a single preference.
3. (3) A requirement that a preference only be awarded to a small business that performs a commercially useful function, as defined in subdivision (e).
4. (4) A policy regarding oversight and potential fraudulent behavior on the part of a contractor, subcontractor, or individual for the purpose of qualifying as a small business and being awarded a preference.
5. (5) A policy for determining whether a contractor has made a good faith effort, pursuant to paragraph (3) of subdivision (a).

6. (6) A policy on how a prime contractor may substitute a subcontractor, pursuant to subparagraph (B) of paragraph (3) of subdivision (a). This policy shall, at a minimum, include all of the following:

   1. (A) The identification of the condition or conditions for which a substitution of subcontractors is authorized.
   2. (B) A requirement that construction subcontractors awarded construction subcontracts under this section shall be afforded all the protections of the Subletting and Subcontracting Fair Practices Act (Chapter 4 (commencing with Section 4100)).
   3. (C) A requirement that a subcontractor that served to qualify the bid package for a preference shall be replaced only with a subcontractor meeting the eligibility requirements of subdivision (b).
   4. (D) A requirement that the condition qualifying the substitution be verified with the subcontractor.

(d) Every entity used to qualify a bid for a preference pursuant to this section shall perform a commercially useful function. A “commercially useful function” means:

1. (1) A contractor is deemed to perform a commercially useful function if the contractor, including a subcontractor, does all of the following:

   1. (A) Is responsible for the execution of a distinct element of the work of the contract.
   2. (B) Carries out its obligation by actually performing, managing, or supervising the work involved.
   3. (C) Performs work that is normal for its business services and functions.
   4. (D) Is responsible, with respect to products, inventories, materials, and supplies required for the contract, for negotiating price, determining quality and quantity, ordering, installing, if applicable, and making payment.
   5. (E) Is not further subcontracting a portion of the work that is greater than that expected to be subcontracted by normal industry practices.
2. (2) A contractor or subcontractor shall not be considered to perform a commercially useful function if the contractor’s or subcontractor’s role is limited to that of an extra participant in a transaction, contract, or project through which funds are passed in order to obtain the appearance of a small business.