BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 629|
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THIRD READING
Bill No: SB 629
Author: Liu (D)
Amended: 4/21/09
Vote: 21
SENATE JUDICIARY COMMITTEE : 4-1, 4/14/09
AYES: Corbett, Harman, Florez, Leno
NOES: Walters
SUBJECT : Private works of improvement: retention
proceeds
SOURCE : American Subcontractors Association, California
DIGEST : This bill, applicable to all contracts entered
into on or after January 1, 2010, prohibits retention
proceeds withheld form any payment made by an owner to the
original contract from exceeding five percent of the amount
otherwise due under the contract. This bill prohibits the
percentage of the retention proceed withheld from any
payment made by the original contractor to any
subcontractor, or by a subcontractor to another
subcontractor, from exceeding five percent of the amount
otherwise due under the contract, or the percentage of each
payment that may be withheld under the contractor,
whichever is less.
This bill requires any retention proceeds withheld to be
deposited in an interest-bearing escrow account and, upon
the release of any retention proceeds, the contractor or
CONTINUED
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subcontractor to whom the proceeds were released would be
entitled to any accrued interest. The bill requires that,
with respect to a contract between an original contractor
and a subcontractor, or between two subcontractors, any
retention proceeds withheld, together with accrued
interest, be released within 45 days after the date that
all line items listed in the schedule of values in the
applicable contract are completed or the work for those
line items are accepted.
ANALYSIS : Existing law provides that a prime contractor
or subcontractor must pay subcontractors, to the extent of
their interest therein, within 10 days of receipt of any
progress payment, unless otherwise agreed to in writing.
In the event of a good faith dispute over the amount due,
the prime contractor or subcontractor may withhold up to
150 percent of the disputed amount. This section applies
to private and public works of improvement, except as
specified.
Existing law provides for the distribution of any proceeds
withheld by a project owner (retention proceeds) within 45
days of completion of a private work of improvement.
However, an owner may withhold up to 150 percent of any
disputed amount. Existing law also provides that an
original contractor must pay subcontractors their share
from the received retention within 10 days, but may
withhold up to 150 percent of any disputed amount.
Existing law provides that on a private work of improvement
the owner shall pay progress payments due under a contract
within 30 days of a demand for payment, but may withhold up
to 150 percent of any disputed amount.
Existing law defines "date of completion" as the date of
issuance of any certificate of occupancy covering the work
by the public agency issuing the building permit; the date
of completion indicated on a valid notice of completion; or
the date of completion as defined in Section 3086 (the
occupation or use of a work of improvement accompanied by
cessation of labor thereon; acceptance by the owner of the
work of improvement; or cessation of labor on a work of
improvement for a continuous specified period).
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This bill, applicable to all contracts entered into on or
after January 1, 2010, prohibits retention proceeds
withheld form any payment made by an owner to the original
contract from exceeding five percent of the amount
otherwise due under the contract.
This bill prohibits the percentage of the retention
proceeds withheld from any payment made by the original
contractor to any subcontractor, or by a subcontractor to
another subcontractor, from exceeding five percent of the
amount otherwise due under the contract, or the percentage
of each payment that may be withheld under the contract,
whichever is less.
This bill requires any retention proceeds withheld to be
deposited in an interest-bearing escrow account and, upon
the release of any retention proceeds, the contractor or
subcontractor to whom the proceeds were released would be
entitled to any accrued interest.
This bill requires that, with respect to a contract between
an original contractor and a subcontractor, or between two
subcontractors, any retention proceeds withheld, together
with accrued interest, be released within 45 days after the
date that all line items listed separately in any schedule
of values (detailed statement outlining the portions and
values of the portions of the contract sum) that forms a
part of the applicable contract are completed or the work
for those line items is accepted.
This bill provides that it would be against public policy
for any party to require any other party to waive any
provision of the bill.
This bill specifies that the provisions of the bill do not
prohibit the withholding of funds in the event of a
dispute.
Related Pending Legislation
SB 802 (Leno) would prohibit retention proceeds from
exceeding five percent of a payment, as specified, for all
contracts entered into on or after January 1, 2010, between
a public entity and an original contractor, between an
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original contractor and a subcontractor, and between all
subcontractors. The bill would also prohibit the
Department of General Services (DGS) from withholding more
than five percent of a contract price until final
completion and acceptance of the project. This bill has
been referred to the Senate Governmental Organization
Committee.
AB 396 (Fuentes) would, among other things, prohibit
retention proceeds from exceeding five percent of a
payment, as specified, for all contracts entered into on or
after January 1, 2010, between a public entity and an
original contractor, between an original contractor and a
subcontractor, and between all subcontractors. This bill
would also prohibit DGS from withholding more than five
percent of a contract price until final completion and
acceptance of the project. The bill has been referred to
the Assembly Business and Professions Committee.
Prior Legislation
SB 593 (Margett), Chapter 341, Statutes of 2008, prohibits
the Department of Transportation from withholding retention
proceeds when making progress payments to a contractor for
works performed on a transportation project. This bill
sunsets on January 1, 2014.
SB 619 (Migden), 2007-08 Session, would have prohibited
retention proceeds from exceeding five percent of a
payment, as specified, for all contracts entered into on or
after January 1, 2008, between a public entity and an
original contractor and a subcontractor, and between all
subcontractors. The bill would also have prohibited DGS
from withholding more than five percent of a contract price
until final completion and acceptance of the project. The
bill died on the Assembly Floor.
AB 1622 (Lieu), 2005-06 Session, would have provided, with
respect to any retention proceeds in a contract entered
into on or after January 1, 2006, between an owner and an
original contractor relating to the construction of a
private work of improvement, retention proceeds withheld
from a payment by the owner to the original contractor, by
the original contractor to a subcontractor, or by any
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subsequent subcontractors would be limited to maximum
retention rates, as specified. The bill would have
required that within 45 days after the date of completion
by the contractor or subcontractor, the retention proceeds
be released with interest. The bill would also have
provided that the provisions governing retention proceeds
that relate to the withholding of disputed amounts would
not be affected by the bill. The bill was vetoed.
SB 920 (Cox), 2005-06 Session, would have, in a contract
with DOT that utilizes federal funds, authorized an
original contractor in a contract between the original
contractor and any subcontractor to withhold five percent
retention when making payments to the subcontractor for
work performed. The bill died on the Senate Appropriations
Committee's suspense file.
AB 940 (Miller and Mazzoni), 1997-98 Session, would have,
among other things, specified the amount of retention
proceeds permitted to be withheld with respect to contracts
between public entities, contractors, and subcontractors,
relating to the construction of any public work of
improvement entered into on or after January 1, 1998. This
bill was vetoed.
AB 1949 (Conroy), 1995-96 Session, would have, until
January 1, 2000, and with respect to contracts entered into
on or after January 1, 1997, that related to the
construction of public works of improvement, revised the
limits on the amount of retention proceeds that may be
withheld, and the amounts of progress payments to be made,
subject to certain conditions. The bill was vetoed.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 4/21/09)
American Subcontractors Association, California (source)
Advanced Installations
Advanced Lab Concepts
Ahlborn Fence & Steel Inc.
Ahlborn Structural Steel Inc.
Alternative Energy
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Anchor Construction Specialties, Inc.
Architectural Wood Design Inc.
Arise/Waco Scaffolding & Equipment
Bagatelos Architectural Glass Systems Inc.
Barbara Roddick at Stoer & Graff Inc.
Bayview General Engineering Inc.
Bellicitti & Fellicciotti Constructio Co. Inc.
Brik-art
Brudvik Inc.
Bullet Guard Corp.
California Association of Sheet Metal and Air Conditioning
Contractors' National Association
California Erectors Bay Area Inc.
California Fence Contractors' Association
Consolidated Partitions Inc.
Construction Industry Products
Construction Preliens & Paperwork
Continental Electric Inc.
Continental Plumbing Inc.
DPW Inc.
Eckles Construction Inc.
Engineering Contractors Association
Engineering & Utility Contractors
Ertel Cabinets & Mill Work Inc.
F.M. Thomas Air Conditioning Inc.
Finishline Wood Crafters Inc.
Flasher/Barricade Association
Golden State Builders Exchange
Jake Lee at Stroer & Graff Inc.
James Riolo Paving Inc.
Ks Telecom Inc.
Karsyn Construction
Legislative Conference of the Plumbing, Heating and Piping
Industry, California Chapter
Lescure Company Inc.
M.F. Filice & Son Surfaces
Magik Glass and Door
Marin Builders' Association
McCurley & Day Masonry
McLennon Law Corp.
Merrit Construction Inc.
Mid-State Steel Erectors Inc.
Muhlhauser Steel Inc.
National Concrete Cutting Company
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National Electrical Contractors Association, California
Chapter
North Bay Drywall & Plastering Inc.
O'Brien Steel Erectors Inc.
P.T.S. Masonry Inc.
Pacific Mechanical Contractors
Partition Specialties Inc.
Pike Heating & Air Conditioning
Porter Law Group
Q.I.S. Inc.
Qualify Fence Company Inc.
R & R Maher Construction Co. Inc.
Randy Bogs Masonry Inc.
Rescue Concrete Inc.
Richwell Steel Company Inc.
Risee Mechanical Inc.
Roger Lee at Stroer & Graff Inc.
Russell Hinton Company
Salvadore Altamirano at Stoer & Graff Inc.
San Joaquin Steel Company Inc.
Schroeder Iron Corporation
Seawright Custom Precast Inc.
Service Metal Products Inc.
Sierra West Construction Inc.
Superior Caseworks Inc.
Supercraft Supply Inc.
Swirdoff Construction Company
Terra Pave Inc.
The Patterson Company Inc.
Tri-Co Floors
Tru-form Construction Corp.
Union Roofing Contractors Association
Waco Scaffolding & Equipment
Wagner Electric
Wayne E. Swisher Cement Contractor Inc.
Williams & Sons Masonry Inc.
OPPOSITION : (Verified 4/21/09)
Associated General Contractors of California
California Building Industry Association
Construction Employers' Association
ARGUMENTS IN SUPPORT : The sponsor, American
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Subcontractors Association, California, provides the
following reasons for the bill:
1.Right now cash flow is the most important element in
construction. Yet, on most projects, 10 percent of money
that is due for work properly performed by subcontractors
is withheld until the entire project is completed. This
means a subcontractor's entire profit margin is absorbed
in the retention. Trades working on the job may go years
before receiving their final payment.
2.Without full payment, subcontractors cannot pay
employees, contribute to their benefit programs, or buy
adequate supplies and tools. The ability to seek or
begin new projects can be delayed as a result.
3.Retainage increases bid prices because contractors have
to account for loss of use and financing costs of
retained funds.
4.Retainage is unnecessary because performance bonds and
the right to withhold payment protect against incomplete
or defective work.
5.Since 1993, the federal government's Fair Acquisition
Regulations have allowed zero retention on projects it
funds, unless poor performance is documented.
6.In the 2007-08 Session, the Legislature responded to this
dilemma for public works projects by passing SB 593
(Margett), Chapter 342, Statutes of 2008, which prohibits
DOT from retaining any payments (zero percent) to
subcontractors once their work has been satisfactorily
completed. This bill parallels this policy by limiting
retention in the private sector to five percent.
7.Numerous other states prohibit or limit retainage
practices.
8.The logic in this approach is inescapable and is critical
to our economic recovery. Full payment for full
performance is fair and responsive to the cash crisis.
Full payment will keep companies in business, stimulate
construction, and keep projects on schedule.
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ARGUMENTS IN OPPOSITION : The Construction Employers'
Association and the California Building Industry
Association oppose this bill on essentially the same
grounds. They write, "Retention serves many purposes; to
soften the blow if a subcontractor defaults or provides an
unacceptable work product; to use as motivation to get a
subcontractor to pay his or her subcontractors if they fail
to do so; and?to help cover any losses associated with the
subcontractor. Under this measure, if a subcontractor were
to default, the contractor would be forced to absorb an
even larger loss, thereby jeopardizing their own solvency.
RJG:cm 4/21/09 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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