BILL ANALYSIS
SB 802
Page 1
Date of Hearing: June 30, 2009
ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS
Mary Hayashi, Chair
SB 802 (Leno) - As Introduced: February 27, 2009
SENATE VOTE : 35-0
SUBJECT : Public contracts: retention periods.
SUMMARY : Prohibits a public entity from retaining more than 5%
of a contract price until final completion and acceptance of a
project. Specifically, this bill :
1)Defines "public entity" to mean the state, including every
state agency, office, department, division, bureau, board, or
commission, the California State University, the University of
California (UC), a city, county, city and county, including
chartered cities and chartered counties, district, special
district, public authority, political subdivision, public
corporation, or nonprofit transit corporation wholly owned by
a public agency and formed to carry out the purposes of the
public agency.
2)Requires that retention proceeds between an original
contractor and a subcontractor, or between two subcontractors,
shall not exceed 5% of payment or contract price. Does not
apply if the contractor provides written notice to the
subcontractor, prior to or at the time that the bid is
requested, that a bond may be required and the subcontractor
subsequently is unable or refuses to furnish to the contractor
a performance or payment bond issued by an admitted surety
insurer.
3)Provides that these provisions shall apply to 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, relating to public works projects.
EXISTING LAW :
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1)Requires payments on contracts with progress payments to be
made as the awarding department prescribes; provides that
state and public agencies shall withhold at least 5% of the
contract price until final completion and acceptance of the
project, and that progress payments upon public contracts
shall not be made in excess of 95% of actual work completed,
except as follows:
a) At any time after 95% of the work has been completed on
a state project, the state may reduce the funds withheld to
an amount not less than 125% of the estimated value of the
work yet to be completed, as specified.
b) Allows a public entity to withhold 150% of the value of
any disputed amount of work from the final payment.
c) At any time after 50% of a local government project is
completed and the legislative body finds that satisfactory
progress is being made, it may reduce or eliminate
withholding.
2)Provides that retention proceeds between a original contractor
and a subcontractor, or between two subcontractors, not exceed
the percentage specified in the contract between the public
entity and the original contractor, and requires an original
contractor to distribute retention proceeds to subcontractors
within seven days of receiving retention proceeds from the
public agency.
3)Requires a contractor in a public works contract to file a
performance bond with the public entity in specified amounts,
depending on the value of the contract.
4)Requires every original contractor who is awarded a contract
by a state entity involving expenditures greater than $5,000
for any public works project, to file a performance bond with
the state entity in a sun equal to or greater than the
contract's total payable amount.
FISCAL EFFECT : Unknown
COMMENTS :
Purpose of the bill . According to the author's office, "SB 802
aims to help smaller California contractors compete for bids on
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public works projects by capping the amount of retention funds
which can be withheld. Existing law requires that not less than
5% of the total payment for time and materials on a public works
project be withheld (Public Contract Code (PPC) Section 10261).
This policy unnecessarily disadvantages small contractors who,
on many occasions, find the amount of retention withheld exceeds
10% of the total cost of the project. While this might not
sound like much at first, in reality the typical profit margin
for the construction industry on these projects is only about 3%
or 4%. This means that contractors must finance up to 7% of the
total project on their own dime. This is a classic pay-to-play
scenario in which large contractors benefit and small
contractors with fewer resources bear an undue burden. They
must either cover the costs of labor themselves or take out
lines of credit while they wait for payments on work completed
to be released. In some cases, contractors pay the interest on
loans for years before being fully paid for their work.
"As a result of the current retention policy, any contractor who
bids on a public works job must anticipate the financing of a
substantial portion of the total value of the contract for an
undefined period of time. For example, if a contract is worth
$5 million, a small business contractor will have to anticipate
taking out a loan of up to $350,000 to cover their payroll and
material expenses in building the project. Many qualified small
businesses simply cannot afford to tie up their own capital or
operate on costly loans for an indefinite period of time. This
limits the pool of available and willing contractors and keeps
otherwise fully qualified and capable contractors from
participating."
Background . Retention proceeds represent a percentage of the
amount of a contract that is withheld from a progress payment by
the public entity to the original contractor, or the original
contractor to one its subcontractors. By withholding a
percentage of a contract, the public entity or the original
contractor maintains a degree of financial control over a
project. In general, the public entity or the original
contractor withholds at least 5% of payment until the contract
is completed to the satisfaction of the public entity or
original contractor.
Current law allows for the retention of a percentage of a
contract price to guaranty a contractor's completion and
acceptance of a project. All California contractors working on
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a public works project are required to possess performance bonds
that cover up to 150% of the cost of any disputed work.
Contractors have an incentive to complete projects without
conflict, because it becomes more difficult to find a bonding
agency willing to bond a contractor who has failed a project.
Performance bonds can be one option a public entity uses to
guarantee that a project will continue to proceed, should a
contractor fail. If a contractor does not meet the contract
obligations and the public entity seeks to use the performance
bonds, the bonding company will seek selects the replacement
contractor to complete the remainder of the contract obligations
at the lowest cost.
According to the author's office, the following states have
capped retention rates at 5%: Arizona, Delaware, Hawaii, Idaho,
Iowa, Maine, Massachusetts, Minnesota, Mississippi, Missouri,
Montana, New York (for bonded contractors), Oregon, Rhode
Island, Utah, Virginia, and Washington.
Supporters argue that retention ties up capital in the current
economy and that there are already many protections in place to
guarantee project completion. The sponsor contends that failure
to complete a project ruins a contractor's reputation and
results in occupational suicide. According to supporters, in
order for contractors to compensate for the additional loan
interest for labor and materials resulting from retention,
contractors may factor in these costs in their contract bids and
therefore increase taxpayer costs for a project. The sponsor
also notes that the federal government does not use retention on
Caltrans projects and that some cities and counties already cap
retention at 5%.
Opponents argue that schools need a guarantee that projects will
be completed on time because schools need to be built according
to strict specifications because they are also used as emergency
shelters. Opponents contend that schools will usually leave a
"punch list" of outstanding concerns to work with the contractor
towards the end of a project as to not hold the project up; the
opponents claim that discretionary retention is appropriate
because retention of 5% or less, depending on the situation, may
not be financially enough to commit the contractor to complete
the remainder of the project according to specifications.
Arguments in support . According to the sponsors, "Current state
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law requires the withholding from contractors of not less than
5% of the contract price. Often times this retention amount can
be as much as 10% or more. The typical profit margin in the
construction industry for public works projects is 3%. In some
cases, contractors must wait for years before being fully paid
for their work. Thus, any contractor who bids on a public works
job must anticipate the financing of as much as 7% of the total
value of the contract for an undefined period of time just to
make payroll and pay suppliers. This includes a non-reliance on
the realization of a 3% profit?
"The current payment retention policy constitutes an unfair and
unreasonable requirement for licensed, responsible and bonded
California contractors. The total cost to taxpayers for public
works improvement projects increase as a result of 1) the loss
of bids from qualified local small businesses, and 2) the bid
inflation that occurs due to the fact that the cost of these
capital loans are built into the cost of the project.
"Public agencies are protected from problems associated with
contractor 'non-compliance' through a variety of mechanisms
rendering the existing retention codes obsolete. In fact under
PCC Section 20129, contractors on public works of improvement
must post 'performance bonds' to ensure completion of the
project. Further, PCC Section 7107 allows a public agency to
withhold an amount up to 150% of the value of the disputed work
from the final payment. These protections, pre-qualification
procedures and others allow public agencies more than adequate
assurances of contractor compliance."
According to the California Landscape Contractors Association
(CLCA), "For many smaller contractors, delays in final payment
can be fatal if credit is unavailable or the delay becomes so
lengthy that interest expenses erase anticipated profits. CLCA
believes that retention amounts of more than 5% are unnecessary
to ensure satisfactory performance of a contract because of the
overlapping protections provided by the performance bond. We
also note that CalTrans, which has eliminated retentions on
federally-funded highway projects, has not encountered any
difficulties with contractor performance. In addition, because
of the risk of a long retention of proceeds after completion of
a public works project, contractors tend to factor these
additional costs into their bids resulting in taxpayer costs
that are higher than necessary.
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"Reforms in public works retention policy are particularly
needed now because of tight credit markets and the need to
expeditiously bid and award infrastructure projects targeted for
federal stimulus funding. The need for this bill is
particularly acute for small contractors who lack the capital
and credit needed to survive excessive retentions and long
payment delays."
According to the State Building and Construction Trades Council,
"Cities and counties using design-build authorization are
required to hold no more than 5% retention on contractors and
recently the UC changed their construction practices to withhold
only 5% retention on its public works projects."
According to CSI Electrical Contractors, Inc., "The practice of
holding retention, along with performance bonding, forces
contractors to cover the costs of financing projects long after
the work has been approved and accepted. Under current law, a
contractor is by common practice on public works, paid 90 cents
on the dollar for work completed and accepted, but has a
financial obligation close to 100 cents on the dollar. These
obligations include meeting payroll, paying employee benefits,
paying material suppliers and all taxes on the value of the work
completed."
According to the Engineering & Utility Contractors Association
(EUCA) and Golden State Builders Exchanges (GSBE), "SB 802
increases competition by allowing highly qualified California
contractors to bid on infrastructure jobs without being forced
to finance up to 7% of the total cost of the project. This
measure also directs more of our taxpayer supported bond revenue
to purchase actual bricks-and-mortar infrastructure versus being
spent on costly interest rates to banks."
Arguments in opposition . According to California's Coalition
for Adequate School Housing, "School districts, in good faith,
negotiate contract provisions and typical retention amounts are
negotiated at approximately 10% of the contract value. If a
contractor and a public agency wish to limit retention proceeds
to 5% - as the bill seeks to achieve - current law allows for
it.
Retention is necessary for public agencies to ensure 1) prompt
completion of a project; 2) that contractors return to a project
to complete all contract requirements, including small
unprofitable punch list items; 3) there are sufficient funds for
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public agencies to correct defective work if a contractor fails
to do so; and 4) to have sufficient funds withheld in order to
pay workers in the event contractors have failed to properly pay
prevailing wage as required by state law. By prohibiting
contract withholdings from exceeding 5%, and removing the
flexibility to negotiate a good faith provision between a public
agency and a contractor, SB 802 significantly thwarts an
agency's ability to ensure that the provisions of their public
works contracts are fully executed.
"Finally, contractors are currently provided the protection
intended by SB 802. Existing statute requires public agencies
to make timely payments of both progress payments and final
payments unless there is a legitimate dispute over work.
Additionally, contractors may opt to place all retention in a
contractor-established escrow account and to receive the
interest from that account."
According to the California State Association of Counties (CSAC)
and the League of California Cities (League), the "bill removes
the authority of public entities to decide the appropriate
amount of retention?local agencies must accept the lowest
responsible bidder and the flexible retention rate helps to
ensure timely and budget-conscious project completion. Local
agencies commonly reduce retention to 5% at the half-way point
of project completion, if adequate progress is being made and
the contractor is acting in good faith. However, SB 802 would
require local agencies to limit retention to 5% regardless of
the progress or good faith of the contractor, thus protecting
bad actions unknown or even known to the public agency, placing
public interests and public funds at risk.
"CSAC and the League have had many discussions in recent years
regarding similar proposals (AB 1949: Conroy, 1996, vetoed; AB
940: Miller, 1997, vetoed; AB 806: Keeley, 1999, vetoed; and,
SB 619: Migden, 2008, held); however, we continue to express
concern over these measures because we have yet to see specific
examples where 10% retention is problematic. On the other hand,
we have specific examples from cities and counties opposed to
these proposals because in certain instances current retention
of 10% is inadequate."
According to a project manager for the Fresno Unified School
District (FUSD), she has "worked in the Public Works arena for
FUSD for over 14 years... (and has) personally been involved in
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numerous projects (where) a 5% withholding would not be enough
to compensate the District, subcontractors or employees in the
event of a failure on the part of the general contractor to
fulfill his contract responsibilities. Many times, the State of
California is dependent on those retention monies to pay back
wages or penalties imposed by the Department of Industrial
Relations."
According to the South Bay Cities Council of Governments,
"Cities use retention in public contracts because it helps
assure that work is done in compliance with the contract
document and serves as a financial incentive for contractors to
complete a project. In addition, should a contractor fail to
perform or not complete the project, the retention funds can be
used to cover the cost of project completion. For many local
agencies, it is also common practice to reduce the retention
rate midway through a project to reward efficient project
completion. Either way, local control over retention rates
should be retained as a tool to ensure project completion is
on-time and within budget."
According to the California Association of School Business
Officials, "Lowering the retention amount to 5% will make it too
easy for unscrupulous contractors to simply cut their losses and
move on if they choose not to complete a project. What's more
is that under current provisions, the 10% retention proceeds are
often put into escrow and collect interest for the contractor
during the project. The incentive to live up to a contract is
greater under current law than under SB 802 if it becomes law."
Related Legislation .
AB 396 (Fuentes) modifies, recasts and, consolidates various
provisions governing the timely payment of progress payments,
retention proceeds, and final payments under a contract for a
public or private work of improvement. This bill was held in
the Assembly Appropriations Committee.
SB 629 (Liu) is a similar bill, 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, applicable to all contracts entered into on
or after January 1, 2010. This bill is currently pending in the
Assembly Rules Committee.
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Previous Legislation .
SB 619 (Migden) of 2007 was an identical bill, was held by the
sponsor on the Senate Floor to continue working with the
Administration.
SB 593 (Margett), Chapter 341, Statutes of 2008, prohibits the
Department of Transportation from withholding retention proceeds
to its contractors when making progress payments for work
performed on a public works project.
AB 806 (Keeley) of 1999 would have limited retention proceeds on
public works contracts to 5%, and prohibits the state, including
all state agencies and political subdivisions of the state,
contractors, and subcontractors from withholding more than 5% of
a scheduled payment on a public works contract. AB 806 was
vetoed by the Governor.
AB 2084 (Miller), Chapter 857, Statutes of 1998, provides that
the percentage of retention proceeds withheld by a contractor
from a subcontractor may not exceed the overall retention
percentage specified in the public works contract between the
contractor and the public agency builder.
AB 940 (Miller) of 1997 would have, among other things, limited
retention payments by public entities on public works to 5
percent. AB 940 was vetoed by Governor Wilson, who made the
following statements in his veto message:
"Regrettably, once again, I find a bill before me that
establishes a double-standard for the treatment of the retention
levels charged by public agencies. The private sector is free
to establish its own level for retention in an open marketplace,
where building owners, contractors and subcontractors freely
enter into construction contracts, which often include a 10%
retention level. Here before me is a bill which would
arbitrarily restrict public agencies to retention rates of half
the private sector standard.
"As I expressed in my veto message of AB 1949 (Conroy) last
year, 'Government agencies must be able to protect public
construction projects from unnecessary risk in a fashion similar
to the private sector.' I have not deviated from that stance.
As a public manager, I believe it is reasonable to ask public
agencies to manage public works projects according to the same
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standards, criteria and level of professionalism as is practiced
in the private sector. It would be irresponsible of me,
however, to tie the hands of public agencies with statutory
restrictions and expect a similar performance standard.
AB 1949 (Conroy) of 1996, would have, among other things,
limited retention payments by public entities on public works to
5%. AB 1949 was vetoed by Governor Wilson.
REGISTERED SUPPORT / OPPOSITION :
Support
California Association of Sheet Metal and Air Conditioning
Contractors' National Association (CAL SMACNA) (sponsor)
California Legislative Conference of the Plumbing, Heating, and
Piping Industry (sponsor)
Abdulaziz, Grossbart & Rudman
ACH Mechanical Contractors, Inc.
AGC, Inc.
Air Conditioning Sheet Metal Association
Air-conditioning & Refrigeration Contractors Association (ARCA)
Air-Ex Air Conditioning, Inc.
American Subcontractors Association California, Inc.
Associated Plumbing & Mechanical Contractors of Sacramento
Best Electrical Company
Building Industry Credit Association
Cadri Company Inc.
California Chapters of the National Electrical Contractors
Association (NECA)
California Fence Contractors' Association, California Chapter
California Landscape Contractors Association (CLCA)
Champion Industrial Contractors, Inc.
Chula Vista Electric Company
Collins Electrical Company, Inc.
Construction Industry Legislative Council (CILC)
Critchfield Mechanical, Inc.
CSI Electrical Contractors, Inc.
Desert Air Conditioning, Inc.
Dynalectric Company
Electric Cal Partners, Inc.
Engineering & Utility Contractors Association (EUCA)
Engineering Contractors' Association
Flasher/Barricade Association
Foothill Air Conditioning and Heating, Inc.
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Glendale Unified School District
Golden State Builders Exchanges (GSBE)
Heating & Air Conditioning, Inc.
Industrial High Voltage
L&H Airco
Lupen and Hawley, Inc.
Marin Builders' Association
Mendenhall Mfg., Inc.
Mike Brown Electric Co.
Power Communication Systems, Inc.
Precision Air Balance Co., Inc.
Ray L Hellwig Mechanical
Ray Scheidts Electric Inc.
R.I.S. Electrical Contractors, Inc.
Schetter Electric, Inc.
Smith Heating & Air
State Building and Construction Trades Council, AFL-CIO
Southern Contracting Company
Tardif Sheet Metal and Air Conditioning, Inc.
Thermal Mechanical, Inc.
Western Air Limbach LP
Western Allied Mechanical, Inc.
Opposition
California's Coalition for Adequate School Housing (CASH)
Anaheim City School District
Association of California School Administrators (ACSA)
Bonita Unified School District
California Association of School Business Officials (CASBO)
California Special Districts Association (CSDA)
California State Association of Counties (CSAC)
Colbi Technologies, Inc.
Dry Creek Joint Elementary School District
Dublin Unified School District
El Dorado Irrigation District
Evergreen School District
Fremont Unified School District
Fresno Unified School District
Glendale Unified School District
Global Business Solutions, Inc.
Hemet Unified School District
Hibser Yamauchi Architects, Inc.
Humboldt County Office of Education
League of California Cities (League)
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Liberty Union High School District
Los Angeles Unified School District (LAUSD)
Milpitas Unified School District
Morgan Hill Unified School District
New Haven Unified School District
Norwalk - La Mirada Unified School District
Oceanside Unified School District
Palo Verde Unified School District
Pleasanton Unified School District
RGM and Associates
Rowland Unified School District
Saddleback Valley Unified School District
San Bernardino City Unified School District
San Ramon Valley Unified School District
Sanger Unified School District
SCArchitect, Inc.
SGI Construction Management (SGI)
Sierra Sands Unified School District
Solano County Board of Supervisors
South Bay Cities Council of Governments (SBCCOG)
Tahoe Truckee Unified School District
Three Valleys Municipal Water District
Travis Unified School District
Victor Elementary School District
Visalia City Council
Western Placer Unified School District
Yosemite Community College District
Analysis Prepared by : Joanna Gin / B. & P. / (916) 319-3301