BILL ANALYSIS
SB 629
Page 1
Date of Hearing: June 30, 2009
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 629 (Liu) - As Amended: June 23, 2009
SENATE VOTE : 31-6
SUBJECT : Private Works of Improvement: Retention Proceeds
KEY ISSUE : Should the retention proceeds withheld by an owner
from payment owed to an original contract, or by an original
contractor from a subcontractor, be limited to 5% of the amount
otherwise due for a private work of improvement?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
In most contracts for private works of improvement (e.g.
remodeling and construction projects) the property owner makes
"progress payments" to the general contractor as the work
proceeds, rather than pay the full contract price up front or
not pay anything until after completion. The general contractor
then typically pays subcontractors, if any, a portion of the
progress payment. However, an owner may hold back a certain
amount of the payment due, known as "retention proceeds," until
45 days after the work is fully completed. General contractors
may in turn, hold retention proceeds owed to the subcontractor
until after the entire project is completed. Retention proceeds
developed as a means by which owners and general contractors
could motivate general contractors and subcontractors,
respectively, to complete the work, and to soften the blow if
the work is not completed or shoddily done. Although existing
law does not place any cap on the percentage of the contract
amount that can be held as retention proceeds, current
construction industry practices appear to set the amount at
about 10% of the amount owed. However, retention proceeds can
be negotiated in the contract, the percentage held can vary
based on things like the subcontractor's reputation and whether
he or she is bonded. This bill would impose a statutory cap of
5% of the contract amount on all private construction contracts
- the contract between the owner and general contractor, and the
contracts between the general and the subcontractors, and
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between subcontractors. This bill is supported by dozens of
subcontractor associations, who claim that subcontractors often
do not receive retention payments until well after their part of
the project has been completed. Moreover, they argue that while
10% may sound like a small figure, it might represent some
subcontractors' entire profit margin. The bill is opposed by
general contractor and builder associations, who claim that
retention proceeds serve an important purpose and, in the
private market at least, should be negotiable rather than set
statutorily.
SUMMARY : Prohibits an owner or general contractor from
withholding "retention proceeds" that exceed 5% the amount
otherwise under a contract for a private work of improvement.
Specifically, this bill :
1)Provides that, for private works of improvement contracted on
or after January 1, 2010, retention proceeds withheld from any
payment made by an owner to a general contractor shall not
exceed 5% of the amount of the contract amount. Provides that
retention proceeds withheld from any payment made by the
general contractor to a subcontractor, or by a subcontractor
to a subcontractor, or between subcontractors, shall not
exceed 5% of the amount otherwise due under the contract, or a
percentage determined under the contract, whichever is less.
In no event shall the total amount of retention proceeds
withheld under all payments made under the contract exceed 5%
of the total contract price.
2)Provides that any retention proceeds withheld by an owner from
a general contractor, by a general contractor from a
subcontractor, or by a subcontractor from another
subcontractor, shall be released within 45 days after the
party seeking the payment of any retained amounts completes
its scope of work and serves the other party with a designated
form demanding release of the retained proceeds.
3)Specifies that it shall be contrary to public policy for any
party to require any other party to waive any provision of
this bill.
4)Specifies that this bill does not prohibit the withholding of
funds in the event of a dispute, as provided in subdivisions
(e) and (f) of Section 3260 of the Civil Code (see below).
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5)Provides that the provisions of this bill shall not apply if
the owner or general contractor provides written notice to the
general contractor or subcontractor, respectively, at the time
of the bid request, that performance or payment bonds may be
required, and the general contractor or subcontractor
subsequently is unable or refuses to provide the owner or
general contractor with a performance or payment bond issued
by an admitted surety insurer.
EXISTING LAW :
1)Requires an owner to pay "progress payments" within 30 days
following a demand made in accordance with the terms of the
contract. (Civil Code Section 3260.1)
2)Requires a general contractor or subcontractor, under a
contract for a private work of improvement, to pay any amount
owed under the contract within 10 days after the receipt of a
progress payment from the owner. (Business & Professions Code
Section 7108.5)
3)Requires any retention proceeds withheld by an owner or
general contractor, under a private work of improvement, to be
released within 45 days the project's date of completion, as
defined. (Civil Code Sections 3260(a), 3086, and 3093.)
4)Provides that in the event of a dispute over work performed,
an owner or general contractor may withhold from any payment
due to the general contractor or subcontractor an amount equal
to 150% of the amount in dispute. (Civil Code Section 3260
(e) and (f).)
5)Specifies that the above provisions relating to retention
proceeds do not apply to retentions withheld by a lender
pursuant to a construction loan contract. (Civil Code Section
3260 (i).)
6)Prohibits Caltrans from withholding any retention proceeds
when making progress payments to a contractor for work
performed on a transportation project. (Public Contracts Code
Section 7202.)
COMMENTS : In most contracts for private works of improvement
(e.g. remodeling and construction projects) the property owner
makes "progress payments" to the general contractor as the work
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proceeds, rather than pay the full contract price up front or
not pay anything until after completion. The general contractor
then typically pays any subcontractors a portion of the progress
payment. However, an owner may hold back a certain amount of
the payment due, known as "retention proceeds," until 45 days
after the work is fully completed. General contractors may in
turn hold retention proceeds owed to the subcontractor until
after the entire project is completed. Retention proceeds have
long been used in the construction industry as a means by which
owners and general contractors could motivate general
contractors and subcontractors, respectively, to complete the
work, and to soften the blow if the work is not completed.
Although existing law does not place any cap on the percentage
of the contract amount that can be held as retention proceeds,
current construction industry practices appear to set the amount
at about 10% of the amount owed. Amounts can vary, however,
depending upon a number of factors, including the reputation of
the subcontractor and the extent to which the subcontractor is
bonded.
As most recently amended, this bill would limit retention
proceeds to 5% of the value of the contract for any private work
of improvement. In addition, whereas existing law requires
release of retention proceeds within 45 days after the "date of
completion" - meaning completion of the entire project - this
bill would require release of retention proceeds within 45 days
after the party seeking payment of proceeds completes the scope
of its work under the contract and has served the withholding
party with a prescribed demand form. Recent amendments also
clarify that the provisions of this bill do not affect the
amounts that may be withheld in the event of a dispute over the
performance of the contract, nor would it apply where a lender
requires a higher retention proceed as part of a construction
loan contract. Finally, recent amendments clarify that the 5%
cap will not apply if the bid request specifies that surety
bonds may be required, but the subcontractor is subsequently
unable or refuses to provide the bonds.
ARGUMENTS IN SUPPORT : According to the author, the purpose of
this measure is to "halt the counterproductive, unnecessary, and
harmful practice of holding back on monies owed on construction
projects to primary contractors and subcontractors for work that
they have already performed and which has been approved."
Noting that under existing industry practices retention proceeds
typically equal 10% of the contract price or more, the author
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contends that "retentions in excess of even 5% exceed most
contractors' and subcontractors' profit margin and so holding it
back means they may not be able to make payroll, provide
employee benefits and buy supplies. This jeopardizes the entire
project." The author also argues that the current practice of
not releasing retention proceeds until the entire project has
been completed is especially unfair to subcontractors, like
earth graders for example, who complete their portion of the
work very early on in the life of the project, but do not get
paid until much later, when the entire project is complete.
This bill is supported by dozens of subcontractor associations
and individual companies that perform subcontracting work. They
point to several perceived flaws and inequities in the existing
system, but generally their arguments fall into one or more of
the following categories:
For many subcontractors, the 10% retention fee is equal to or
greater than a subcontractor's profit margin. This, along
with the fact that proceeds are not released until the entire
project has been completed, even if the subcontractor has
completed its portion of the work, creates serious cash flow
problems. This may mean that a subcontractor is unable to
meet its payroll or buy supplies, thereby potentially delaying
completion of the project (and thereby further delaying the
eventual release of the proceeds.)
Retention proceeds ultimately drive up the total costs of
construction projects, since both the general and
subcontractors must drive up their bids in order to compensate
for the cash flow and other problems created by retention
proceeds.
Many supporters of this bill also contend that retention
proceeds are not really necessary in the current construction
market. First, supporters argue that existing law already
permits an owner or general contractor to withhold 150% of any
disputed amount in the event that questions arise over amounts
owed or the non-performance or inadequate performance of parts
of the contract. Second, most subcontractors carry surety
bonds that protect the owner and general contractor against
default or inadequate performance on the part of the
subcontractor.
Finally, supporters point to trends in the laws governing
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public work contracts and industry guidelines suggesting that
retentions proceeds are both unfair and unnecessary. For
example, the federal government has, since 1983, prohibited
retention proceeds for any public work projects that it funds.
In California, SB 593 (Chapter 341, Stats. of 2008)
prohibited Caltrans from withholding retention proceeds from
any contractors working on public transportation projects. In
addition, supporters claim, even the guidelines approved by
the national Associated General Contractors (ACG) organization
provide that "whenever possible, retainage should be
eliminated or reduced." In sum, the state and federal
government, as well as the industry itself, recognizes that
there are more appropriate alternative means of protecting the
investments of owners and general contractors than retention
proceeds.
ARGUMENTS IN OPPOSITITION : This bill is opposed the Associated
General Contractors (ACG) of California, the California Business
Properties Association, and various builders' associations,
though it is not clear at the time of this writing how many of
the groups listed as opposition below have changed their
position in light of the most recent amendments. In general,
however, the opponents make the following common cluster of
arguments:
Retention proceeds are a long-established practice in the
construction industry that protect the considerable
investments of property owners and general contractors from
defaulting subcontractors; provide incentives for contractors
to complete work in a timely manner; and "soften the blow"
that the owner or general contractor suffer if the defaulting
subcontractor is judgment proof.
Retention proceeds always have been, and should remain,
negotiable. Opponents claim that this bill is unnecessary
because general contractors will already contract for lower
retention proceeds if the subcontractor is someone they have
worked with before, has a good reputation, and/or carries
sufficient performance and payment surety bonds. Because
every work of private improvement is different, opponents
contend, retention proceeds should be negotiated by the
contracting parties rather than determined by legislative
fiat.
Finally, opponents point to a number of specific provisions in
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the language of bill that, they claim, do not adequately
address questions about how to determine the proper completion
date that triggers the clock for releasing retention proceeds;
how the presence or absence of subcontractor surety bonds will
affect the limitations on retention proceeds; and how a
lender's demand for higher retention proceeds in a
construction loan will affect an owner's ability to limit
retention proceeds that it withholds from the general
contractor. As noted above, these issues appear to have been
addressed in the most recent amendments, though it is not
clear if they meet all of the opponents' concerns. Of the
groups that originally opposed this bill, apparently only the
California Building Industry Association has agreed to remove
its opposition.
Possible Committee Amendments : Because stakeholders were still
negotiating remaining issues in good faith and apparently with
considerable progress at the time of this writing, the author
may take additional amendments in Committee. But these
productive negotiations have reached a point that any amendments
taken in Committee would, mostly likely, involve minor
clarifying amendments on the issues noted in the final bullet
point listed above.
Governor's Veto of AB 1622: The author, then a member of the
Assembly, carried a similar bill in 2006 that, like this bill,
capped retention proceeds at 5% of the contract. That bill,
however, included other provisions, including a requirement that
the subcontractor earn interest on any retained amounts, has
been deleted from the bill presently before the Committee. In
addition, the author has worked with all stakeholders to develop
specific language and has managed to remove some opposition,
such as that of the California Building Industry Association.
Therefore, this is a different and more closely negotiated bill
and, as such, more likely to avoid a veto.
Related Pending and Recent Legislation : AB 396 (Fuentes, this
session), among other things, places a 5% cap on retentions for
public works. (Held in Assembly Appropriations Committee.)
SB 802 (Leno, this session) prohibits retention proceeds from
exceeding 5% of the payment, between a public entity and an
original contractor, between an original contractor and a
subcontractor, and between all subcontractors on public works
projects. (Pending in Assembly Business & Professions
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Committee.)
AB 1622 (Liu) (2005/2006) would have capped retention proceeds
at 5% in on all contracts for private works of improvement. The
author's prior bill - like earlier versions of the present bill
that were removed in the last amendments - contained provisions
dealing with interest accrual on withheld retention proceeds.
Vetoed.
SB 593 (Chapter 341, Stats. of 2008) prohibits the Department of
Transportation from withholding retention proceeds when making
progress payments for work performed by a contractor on
transportation projects.
REGISTERED SUPPORT / OPPOSITION :
Support
More than seventy-five letters from various companies and
subcontractor associations, including the following:
Over 75 letters of support on file at Senate Judiciary Committee
including:
California Association of Sheet Metal and Air Conditioning
Contractors' National Association
Union Roofing Contractors Association
Engineering and Utility Contractors Association
Golden State Builders Exchanges
California chapters of the National Electrical Contractors
Association
California Legislative Conference of the Plumbing, Heating and
Piping Industry
The Blakely Co., INC.
Burnett & Sons Planing Mill and Lumber CO., INC.
Henley & CO.
Rpg Enterprises
Farrell Design-Build
Construction Industry Legislative Council
A California Corporation
All Contractors, Inc.
Shapiro-Ben Basat
American Sheet Metal Partition Co., Inc.
Painting and Decorating Contractors of California
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Opposition (to pre-amended version)
Construction Employers Association
California Building Industries Association
Associated General Contractors
California Apartment Association
California Business Properties Association
California Major Builders Council
California Retailers Association
Santa Barbara Rental Property Association
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334