BILL ANALYSIS Ó
SB 293
Page 1
Date of Hearing: August 17, 2011
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
SB 293 (Padilla) - As Amended: August 15, 2011
Policy Committee: Business and
Professions Vote: 8-0
Judiciary 9-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill establishes a four-year limit on retention in public
works projects, with specified exceptions, and modifies
provisions regarding payments to subcontractors and provisions
regarding subcontractor claims for nonpayment. Specifically,
this bill:
1)Limits retention-the amount withheld from public works
contract progress payments by any state or local public entity
to a contractor, by the contractor to a subcontractor, or by a
subcontractor to a subordinate subcontractor-to no more than
five percent of the payment for all contracts entered into
after January 1, 2012.
2)Stipulates that the above does not apply if a subcontractor,
following written notice by contractor, is unable or refuses
to furnish a payment or performance bond.
3)Authorizes retention exceeding five percent, between awarding
entities, contractors, and subcontractors, under the following
circumstances:
a) The director of a state department awarding the contract
makes a finding prior to the bid that the project is
substantially complex and therefore requires a higher
retention, and this finding and the actual retention is
included in the bid documents, which shall also be the
maximum retention on payments to subcontractors.
b) The governing body of a local government entity awarding
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the contract adopts the same procedures as in (a).
4)Sunsets the above retention provisions on January 1, 2016.
5)Reduces, from 10 to seven, the number of days after receiving
a progress payment that a contractor or subcontractor must pay
a subcontractor, unless otherwise agreed to in writing.
6)Establishes that a subordinate contractor, who has not
provided a contractor with a 20-day preliminary bond notice,
may not enforce a claim against the contractor-by giving
written notice to the surety and bond principal within 15 days
of the notice of completion, or if no notice of completion has
been recorded, within 75 days after completion of the work-if
all payments, except those disputed in good faith, have been
made by the contractor to the subcontractor with whom the
subordinate subcontractor has a contractual relationship.
7)Clarifies the 20-day preliminary bond notice requirement does
not apply to laborers.
FISCAL EFFECT
In general, reducing the amount of retention that can be
withheld would to some extent increase the likelihood that a
contractor or subcontractor would fail to fully perform their
work, and thus could lead to higher costs to the contracting
entity related to the administrative burden, project delays, and
potential litigation associated with finding alternative means
to complete the work.
1)In most cases, the fiscal impact to the state would likely be
minor. According to the Department of General Services, the
use of a retention amount exceeding 5% is an exception on
state projects, and is used generally only on smaller
projects.
2)The University of California has a 5% retention practice.
Caltrans contracts funded at least in part with federal monies
(85% of all Caltrans capital outlay) have no retention
provisions, as required by federal law.
3)The exception at the state level is the California State
University (CSU), which is opposed to this bill and argues
that limiting retention will remove a tool available to
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protect against contractor non-performance. CSU cites the
example of an $18 million project that, based on the current
schedule is projected to finish two years behind schedule.
Were this bill in effect, about $900,000 in retention would be
withheld, but the university would be entitled to almost $2
million in liquidated damages for late completion. This would
leave CSU $1.1 million short, which might have to be recovered
from the contractor through legal means, thus entailing even
more costs. CSU argues that in these situations, it is
preferable to ratchet up the retention level above 5% rather
than attempt to seek reimbursement on the back end of a
project.
4)The fiscal impact on local governments could be more
significant as they are generally more likely to use a
retention amount exceeding 5%, and thus would be restricted by
this bill. Any additional costs associated with this
limitation would not be reimbursable, however. In addition,
unlike previous legislation proposed to limit retention, this
bill allows local governments, as well as state agencies, to
establish higher retention on projects they deem to be
complex.
COMMENTS
1)Purpose . According to the author, "With California's economy
and cash flow continuing to tighten, it is important for
contractors to keep close controls on payments, moneys owed,
as well as potential disputes. The construction industry has
come together to resolve payment related issues that
predominately occur in the public works context. The solution
presented is a multi-prong approach that will reduce retention
on public works payments to no more than 5%, unless a surety
bond is requested and the subcontractor is unable to provide a
bond?In addition, the prompt payment statutes for public and
private works are often difficult to find for the small and
emerging contractor, so in an attempt to ease clarity in the
code it has been drafted to consolidate the statutes on prompt
payment.
"Lastly, in private works, any person who provides
construction services or materials to a construction project
has the right to file a mechanic lien on the property if they
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are not paid; however, prior to filing the lien, a 20 day
preliminary lien notice must be filed with the owner
identifying the subcontractor or material supplier and
notifying the owner of the potential mechanic lien in the
event payments are not forthcoming for work performed or
materials provided. In public works, instead of a mechanic
lien against the property title, there are "claims" that can
be made against the surety bond, which such bonds are required
for all public works projects meeting a minimum dollar
threshold. The 20-day notice applies in public works, but
provides that if the notice is not filed, the contractor is
not penalized and can make a claim up to 75 days after the
notice of completion. This area of the law has been revised to
? avoid general contractors from being hit by "surprise"
claims from second and third tier subcontractors."
2)Retention proceeds represent a percentage of the amount of a
contract that is withheld from a progress payment by the
public entity to the general contractor, or the general
contractor from one its subcontractors. The withholding of
these amounts allows the public entity or general contractor
to maintain a degree of financial control over a project.
Current law requires the state and public agencies to withhold
at least 5% of the contract price until final completion and
acceptance of the project, except as follows:
a) For state projects, after 95% of the work has been
completed, the total funds withheld may be reduced to an
amount of at least 125% of the value of the work yet to be
completed.
b) For local agency projects, at any time after 50% of a
project is complete and the legislative body finds that
satisfactory progress is being made, it may reduce or
eliminate further withholding.
3)Opposition . In addition to several individual local government
entities, numerous organizations representing various sectors
of local government plus the CSU have jointly registered their
opposition to imposing a statutory retention limitation. These
organizations note that, unlike the private sector, they must
accept the lowest responsible bidder, which creates risk, and
they argue that limiting retention could, in some cases,
reduce a contractor's incentive to complete a job, thus
increasing costs to the public entity.
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4)Prior Legislation . In 2010, AB 2216 (Fuentes), which contained
similar provisions, failed passage in the Senate. In 2009, SB
802 (Leno), which limited retention for five percent, was
vetoed by Governor Schwarzenegger, who expressed concern that
such a limit would harm public agencies' ability to complete
project on time and within budget. In 2008, an identical bill
(SB 619, Migden) passed the Assembly but was held and not sent
to the governor. Several bills with similar retention
limitations have been vetoed: AB 806 (Keeley) of 1999; AB 940
(Miller) of 1997; and AB 1949 (Conroy) of 1996.
Analysis Prepared by : Chuck Nicol / APPR. / (916) 319-2081