What is Commercially Useful Function (CUF) on a state funded project?

Performing a Commercially Useful Function (CUF) is a critical requirement of doing business with the state. This information is relevant to you, whether you are a prime contractor or a subcontractor doing business with the state. It is the law! Each certified Small Business (SB) or Disabled Veteran Business Enterprise (DVBE) must perform a CUF when bidding/participating on any state contract as a contractor, subcontractor, or supplier of goods and/or services, regardless of the procurement or payment method. If you are a prime contractor subcontracting with a state-certified SB or DVBE, it is recommended that you verify the subcontractor(s) can perform a CUF on a specific contract before listing them on the bid documents.

Important note! The CUF requirements referenced in this article apply to SBs and DVBEs certified by the state of California and differ from the federal CUF requirements for Disadvantaged Business Enterprises (DBEs). 

 What does performing a Commercially Useful Function (CUF) mean? To perform a CUF on a specific contract, an SB and/or DVBE must do all of the following:

·      Execute a distinct element of the contract work, including supplying of goods/services.

·      Perform, manage, or supervise the work, including supplying of goods/services.

·      Perform work that is normal for the firm’s business services and functions.

·      Be responsible – with respect to products, inventories, materials and supplies required for the subcontract – for negotiating price, determining quality and quantity, ordering, installing (if applicable), and paying for the material.

·      Not subcontract a portion of the work greater than expected by industry practices.

A contractor, subcontractor, or supplier will not be considered to perform a commercially useful function if the contractor’s, subcontractor’s, or supplier’s role is limited to that of an extra participant in a transaction, contract, or project through which funds are passed in order to create the appearance of small business or microbusiness participation.

Being certified SB or DVBE does not mean the firm automatically performs CUF! Prior to the contract award, all state buyers/contract administrators/contract managers will evaluate and determine whether each of the certified firms bidding/participating on a contract performs a CUF. Post-award, contract officials are responsible for monitoring CUF performance during the contract term, particularly while the certified firm performs the work and in case of certified firm(s)substitutions. If you are a prime contractor subcontracting with state-certified SBs and DVBEs, it is recommended that you verify the subcontractor(s) can perform a commercially useful function on a specific contract before listing them on the bid documents. If one of the certified subcontractors does not perform CUF and impacts your ability to meet the contract participation goal, there is a potential risk that your bid may not be found responsive/responsible.

 CUF performance must be evaluated on each contract! Don’t assume that if a SB or DVBE performed CUF on one contract, it will automatically perform CUF on the next one.

How does the state evaluate CUF performance? All state departments carry the responsibility to evaluate whether the certified firm(s) on each contract perform CUF prior to awarding a contract and during the contract term. Once the CUF determination is made by the awarding department, there is no appeal mechanism with DGS, and CUF evaluations are not grounds for award protests. To help state departments with CUF performance evaluations, the DGS Procurement Division –in a joint effort with its DGS Small Business Advisory Council members and other state departments – developed and published in December 2015 the following CUF-related sample documents:

·      CUF Evaluation and Determination Worksheet (MS Word)

·      Frequently Asked Questions regarding CUF (PDF)

There are penalties and sanctions for CUF violations. Penalties are applicable to any person who knowingly, and with intent to defraud, violates CUF statutory provisions in order to obtain/retain bid preference for a state contract. Sanctions and/or penalties can be applied to SBs, DVBEs, large noncertified businesses, their principals and business affiliates, and state government employees, and include:

·      Revocation of SB and/or DVBE certification for five years (first violation), or 10 years (second violation).

·      Suspension from doing business with the state for a period between three and 10 years.

·      Referral to Attorney General for civil action.

·      Misdemeanor carrying jail sentence of up to six months, and/or up to $1,000 fine.

·      Civil penalties ranging from $10,000 (first violation) to $50,000 (second and subsequent violations).

·      Payment of all costs and attorney’s fees incurred by the state.

To learn more:

CUF law: Government Code Section 14842.5 for SBs, and Military and Veterans Code Section 999(b)(5)(B) for DVBEs

CUF regulations: California Code of Regulations Sections 1896.15 and 1896.71

CUF information: CUF Brochure and CUF FAQs.  

CUF questions and to file an SB/DVBE-related complaint with DGS: Email SB.DVBECompliance@dgs.ca.gov or call DGS’ Office of Small Business and Disabled Veteran Business Enterprise Services (OSDS) at (916) 375-5936.