BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 1354
                                                                  Page  1

          Date of Hearing:   May 3, 2011 

              ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER 
                                     PROTECTION
                                 Mary Hayashi, Chair
                    AB 1354 (Huber) - As Amended:  April 26, 2011
           
          SUBJECT  :   Public works: progress payments: notice: retention 
          proceeds. 

           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)Decreases, from 10 to 7, the number of days within which a 
            prime contractor or subcontractor must pay a subcontractor 
            after receiving a progress payment, unless otherwise agreed to 
            in writing. 

          2)Requires, in public works projects, a claimant to give written 
            notice to the surety and bond principal that he or she is 
            enforcing a claim prior to completion, or recordation of 
            notice of completion, of the project, commencing January 1, 
            2012. 

          3)Prohibits, in public works projects, an original contractor or 
            subcontractor from retaining more than 5% of payment or 
            contract price from a subcontractor, and more than the 
            retention percentage between the public entity and original 
            contractor, and: 

             a)   Does not apply when subcontractors fail to provide proof 
               of a performance or surety bond to satisfy a contractor's 
               written notice prior to a bid request, as specified.

             b)   Applies to contracts entered into between January 1, 
               2012 and January 1, 2016.

             c)   Sunsets the 5% retention provisions for public works 
               projects on January 1, 2016. 

          4)Requires the Department of General Services (DGS), until 
            December 31, 2005, to retain no more than 5% of the contract 
            price until final completion and acceptance of the project, 
            and authorizes DGS, once the project is completed, to reduce 








                                                                  AB 1354
                                                                  Page  2

            the amount retained to no less than 125% of the value of work 
            to be completed.  Sunsets these provisions on January 1, 2016.

          5)Requires DGS, commencing January 1, 2016, to retain no less 
            than 5% of the contract price until final completion and 
            acceptance of the project, and authorizes DGS, once the 
            project is 95 % completed, to reduce the amount retained to no 
            less than 125% of the value of work to be completed.  

          6)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.

           EXISTING LAW  : 

          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; and, 

             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 an original 
            contractor and a subcontractor, or between two subcontractors, 
            not exceed the percentage specified in the contract between 








                                                                  AB 1354
                                                                  Page  3

            the public entity and the original contractor, and requires an 
            original contractor to distribute retention proceeds to 
            subcontractors within 10 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 sum equal to or greater than the 
            contract's total payable amount. 

          5)Requires that, for private and public works of improvement, 
            and in a public works contract, a prime contractor or 
            subcontractor pay to any subcontractor, not later than 10 days 
            after receipt of each progress payment, unless otherwise 
            agreed to in writing, the respective amount allowed the 
            contractor on account of the work performed by the 
            subcontractors, to the extent of each contractor's interest 
            therein, as prescribed.

          6)Requires, with regard to a contract entered into on or after 
            January 1, 1995, that in order to enforce a claim upon any 
            payment bond given in connection with a public work, that a 
            claimant give the 20-day public works bond preliminary notice, 
            as provided.  Existing law further authorizes a claimant, if 
            the 20-day public works preliminary bond notice was not given 
            as prescribed by statute, to enforce a claim by giving written 
            notice to the surety and the bond principal, as provided, 
            within 15 days after recordation of a notice of completion, or 
            if no notice of completion has been recorded, within 75 days 
            after completion of the work of improvement. 

           FISCAL EFFECT  :   Unknown

           COMMENTS  :   

           Purpose of this bill  .  According to the author's office, "This 
          bill seeks to provide a relief to the construction industry by 
          limiting contractor retentions in public works construction 
          projects to 5%.  Current law requires public agencies to retain 
          a minimum of 5% of the total cost of a public works contract 








                                                                  AB 1354
                                                                  Page  4

          (except for Department of Transportation projects - 0% 
          retention) as an assurance for the timely completion and quality 
          of the contractor's work.  Though retainage serves as a type of 
          insurance for a public agency, it has the unfortunate effect of 
          requiring contractors to complete work without full payment.  
          This practice requires contractors in essence to finance the job 
          themselves, making it difficult to timely pay their own 
          creditors, employees and purchase materials.

          "The sponsor, the American Subcontractors Association, indicates 
          profit margins in the construction industry are now typically 
          less than 2%.  Excessive retention by public agencies on the 
          industry at this time makes it difficult for many contractors to 
          stay in business.  Under this bill, a contractor or 
          subcontractor that has completed its work and the public agency 
          has approved that work as satisfactory, the contractor or 
          subcontractor would be paid at least 95% of the amount owed.  
          Ensuring that retention is limited to 5% helps keep those in the 
          construction industry working. 

          "In addition to retention, public agencies already have many 
          tools to ensure contractor compliance and protect taxpayers 
          dollars, such as prequalifying contractors prior to the bid 
          process, ensuring they are in good standing and known for 
          quality work; requiring contractors to provide performance bonds 
          to ensure faithful completion of a project; and withholding from 
          progress payments to contractors an amount up to 150% of the 
          value of any disputed work."

          Background  .  

           Retention  .  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 








                                                                  AB 1354
                                                                  Page  5

          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. 

           Liens & Bond Claims  .  In private works, any person who provides 
          construction services or materials to a construction project has 
          the right to file a lien on the property if they are not paid; 
          however, prior to filing the lien, a 20-day preliminary lien 
          notice must be filed with the owner and general contractor 
          identifying the contractor and notifying the owner and general 
          contractor of the potential lien claim.  This must be done 
          within 20 days from first furnishing labor or materials.  After 
          an owner files a notice of completion, a contractor has 60 days 
          to record a lien and a subcontractor or materials supplier has 
          30 days.   

          In public works, instead of a lien claim, there are claims that 
          can be made against the surety bond, referred to as a bond 
          claim.  The 20-day notice applies in public works, but even if 
          the notice is not filed, the contractor can make a claim within 
          15 days after recordation of a notice of completion, or if no 
          notice of completion has been recorded, up to 75 days after the 
          notice of completion.  This bill revises this timeline to 
          require the bond claim be filed before the final notice of 
          completion.  The author's office argues that this change avoids 
          general contractors from being hit by "surprise" claims.  

           Progress Payments  .  This bill also reduces the time period a 
          general contractor has to pay his or her subcontractor after the 








                                                                  AB 1354
                                                                  Page  6

          general has been paid a progress payment from the owner.  This 
          time period is reduced from 10 to 7 days.  It is unclear what 
          percentage of payments occur in the last 3 days of this window, 
          and whether the reduction to 7 days will have any significant 
          impact.   

          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.  

           Support  .  According to the sponsor, American Subcontractors 
          Association California, Inc., "Reducing retention increases cash 
          flow which enables contractors to purchase materials instead of 
          taking out loans; this leads to lower bids.  Lower retentions 
          also keep people working instead of being laid off due to lack 
          of cash flow to the contractors.   Because contractors' profit 
          margins are typically much less than 5%, any retention above 
          this amount is an unfair withholding of the contractors' own 
          money. "

          According to the California Landscape Contractors Association 
          (CLCA), "Most public agencies today withhold at least 5% of the 
          contract, and prime contractors in turn withhold the same 
          percentage from the various subcontractors on the project.  In 
          some instances, the retention amount has been as high as 10% of 








                                                                  AB 1354
                                                                  Page  7

          the contract price.  Agencies often withhold retention proceeds 
          long after the project is completed and drag out final approvals 
          for months, and sometimes years, before the prime contractor and 
          subcontractors are fully paid.  Because profit margins on public 
          works contracts are usually less than 5%, contractors are often 
          required to borrow money to pay for employee wages and materials 
          while awaiting final payment from the contracting agency.  For 
          smaller contractors, delays in final payment can be fatal if 
          credit is unavailable or the delay becomes so lengthy that 
          interest expenses erase profit margins.  

          "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.  ÝCLCA] also notes 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." 

           Opposition  .  According to a coalition of opponents, "AB 1354 
          puts scarce resources for schools, hospitals, parks, fire 
          houses, and other public infrastructure at risk.  Contract 
          retention ensures that:  public projects are delivered on time 
          and on budget; contractors complete all contract requirements, 
          including small unprofitable punch-list items; there are 
          sufficient funds to correct defective work if a contractor fails 
          to do so; and, there are sufficient funds to pay workers in the 
          event contractors fail to pay prevailing wage properly.  A 5% 
          retention cap diminishes out ability to ensure that the 
          provisions of our construction contracts are fully executed, and 
          therefore our ability to protect state and local taxpayer 
          dollars.

          "Supporters assert that this bill is in response to the downturn 
          in the economy; however, this is the eighth attempt to enact 
          this legislative proposal, the first of which dates back to 
          1996.  We do not believe that this legislation is in response to 
          the hard economic times, rather a solution in search of a 
          problem?   Current law provides contractors the ability to 
          establish escrow accounts that allow retention proceeds to gain 
          interest payments for the contractor while providing adequate 
          assurance to the public agency that the project will be 








                                                                  AB 1354
                                                                  Page  8

          completed.  Additionally, 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. 

          According to the Los Angeles County Board of Supervisors, "The 
          Los Angeles County Department of Public Works (DPW) states that 
          retention funds may be used to satisfy the claims of unpaid 
          subcontractors and suppliers, fund the cost of completing the 
          work if the contractor fails to do so, and to fund the cost of 
          emergency work or work performed by an agency when the 
          contractor fails to respond.  Also, the amount of liquidated 
          damages may be withheld from the amount of retention paid.  DPW 
          states that AB 1354 would remove a major incentive for 
          completion, would eliminate the value of stop notices and a 
          subcontractor's or supplier's right to place a lien against 
          retained funds, would make collection of liquidated damages more 
          difficult, and would eliminate a tool for general contractors to 
          ensure the completion of work by their subcontractors."

           Previous Legislation  .  AB 2216 (Fuentes) of 2010 would have 
          reduced the time available to a claimant to give written notice 
          that he or she is enforcing a claim against a bond for a public 
          works project, and decreases the time period during which a 
          contractor must pay his or her subcontractors.   This bill was 
          held on the Senate Floor. 

          SB 802 (Leno) of 2009 was a similar bill that would have 
          prohibited a public entity from retaining more than 5% of a 
          contract price until final completion and acceptance of a 
          project.  The Governor vetoed this bill with the following 
          message: 

               When a contractor fails to complete a public works project, 
               the public entity needs recourse to ensure that the project 
               gets completed.  Public works contracts have a higher level 
               of risk as public entities usually have to accept the low 
               bidder.  Though there are options available to the State to 
               go after a contractor who fails to complete the terms of a 
               public works contract, retaining portions of payment to the 
               contractor provides incentive for the contractor to 
               complete the project.   While I am sympathetic with the 
               concerns of subcontractors, the State's responsibility is 
               to protect the taxpayer to make certain that public works 
               projects are completed correctly and within budget; 








                                                                  AB 1354
                                                                  Page  9

               limiting the retention amount hampers the State's ability 
               to do that.

          AB 396 (Fuentes) of 2009, would have reduced the time available 
          for a claimant to make a claim against a bond by providing that 
          if a claimant has not provided a 20-day public work preliminary 
          bond notice as specified, the claimant may enforce a claim by 
          giving written notice to the surety and bond principal prior to 
          the completion of the project or recordation of a notice of 
          completion.  This bill was held in the Assembly Appropriations 
          Committee.

          REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          American Subcontractors Association California, Inc. (sponsor)
          AAA Fence Company, Inc. 
          Brady Company/Los Angeles, Inc. 
          Burnett & Sons 
          California Landscape Contractors Association
          Chula Vista Electric
          Construction Industry Legislative Council
          Construction Preliens & Paperwork
          Delta Electrical Construction, Inc. 
          Dowdle & Sons Mechanical, Inc. 
          Dynamic Forecast Co., Inc. 
          Masonry Concepts, Inc. 
          Partition Specialties, Inc. 
          PTS Masonry, Inc. 
          Surety Associates of Southern California 
          Swiridoff Construction Co. 

           Opposition 
           
          Anaheim City School District
          Association of California Construction Managers
          Association of California Healthcare Districts 
          Association of California Water Agencies 
          Associated General Contractors
          Banta Elementary School District
          Beaumont Unified School District 
          California Association of Joint Powers Authorities 
          California Association of Sanitation Agencies
          California Special Districts Association 








                                                                  AB 1354
                                                                  Page  10

          California State Association of Counties
          City of Lakewood
          Coalition for Adequate School Housing 
          Community College Facility Coalition 
          Construction Employers' Association 
          Corona-Norco Unified School District
          County Sanitation Districts of Los Angeles County
          County School Facilities Consortia 
          Desert Water Agency 
          East Valley Water District 
          El Dorado Irrigation District 
          Fresno Unified School District 
          Irvine Ranch Water District 
          League of California Cities 
          Los Angeles County Board of Supervisors 
          Los Angeles Unified School District 
          Regional Council of Rural Counties 
          Riverside County Superintendent of Schools 
          San Marcos Unified School District 
          Three Valleys Municipal Water District
          Tracy Unified School District 
           
          Analysis Prepared by  :    Joanna Gin / B.,P. & C.P. / (916) 
          319-3301