BILL ANALYSIS
SB 629
Page 1
SENATE THIRD READING
SB 629 (Liu)
As Amended June 23, 2009
Majority vote
SENATE VOTE :31-6
JUDICIARY 6-3
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|Ayes:|Feuer, Brownley, Jones, | | |
| |Krekorian, Lieu, Monning | | |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Tran, Knight, Silva | | |
| | | | |
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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
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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).
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.
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.
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.
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.
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.
6)Prohibits Caltrans from withholding any retention proceeds
when making progress payments to a contractor for work
performed on a transportation project.
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FISCAL EFFECT : None
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
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.
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.
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
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system, but generally their arguments fall into one or more of
the following categories:
1)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.
2)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.
3)The trend in both private and public works projects is toward
elimination of retention. 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
This bill is opposed by the Associated General Contractors of
California, the California Business Properties Association, and
various builders' associations. Although opponents raise
concerns about certain provisions of the bill, such the
appropriate "time of completion" that triggers the 45-day clock
for release of proceeds, the opponents make two more general
arguments in defense of negotiated retention proceeds:
1)Retention proceeds are a long-established practice in the
construction industry that protect the considerable
investments of property owners and general contractors from
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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.
2)Retention proceeds have always been, and should remain,
negotiable. Opponents claim that this bill is unnecessary
because a general contractor will often agree to lower
retention proceeds, based on the reputation of the
subcontractor, the general contractor's prior relations with
the subcontractor, or the extent to which the subcontractor is
bonded.
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334
FN: 0001686