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 SB 293 Page 2 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 SB 293 Page 3 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 SB 293 Page 4 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. SB 293 Page 5 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