BILL ANALYSIS Ó
Bill No: AB
1705
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Lou Correa, Chair
2013-2014 Regular Session
Staff Analysis
AB 1705 Author: Williams
As Amended: March 28, 2014
Hearing Date: June 10, 2014
Consultant: Paul Donahue
SUBJECT
Public contracts: Retention of contract payments
DESCRIPTION
Limits the circumstances under which public agencies may
withhold more than 5% of total payment amounts for time and
materials on substantially complex public works projects.
Specifically, this bill:
1)Requires a state agency that plans to withhold more than
5% of the contract price by making a finding, prior to
the bid, that a project is substantially complex, to
include in bid documents an explanation of the basis for
that finding, and the actual amount above 5% to be
retained by the agency during the project.
2)Specifies that if a local government agency intends to
require a retention amount higher than 5% on a specific
project, it must make the findings that the project is
substantially complex during a properly noticed and
scheduled public hearing prior to the bid.
3)Declares that public projects are not substantially
complex if they are maintenance projects, or are projects
that are regularly, customarily, or routinely performed
by the agency or by licensed contractors.
4)Provides that in a contract between the original
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contractor and a subcontractor, and in a contract between
a subcontractor and any subcontractor, the percentage of
the retention proceeds withheld shall not exceed the
percentage specified in the contract between the public
agency and the original contractor.
EXISTING LAW
1)Prohibits state and local public agencies from retaining
more than 5% of a contract price until final completion
of a project, unless the public agency finds that the
project is substantially complex pursuant to specified
circumstances.
2)Authorizes a public entity to withhold more than 5% of
the contract price if a project is deemed to be
substantially complex under specified circumstances.
3)Prohibits retention amounts between contractors and
subcontractors from exceeding the retention percentage
specified in the contract between the public agency and
the original contractor.
4)Repeals these provisions governing retention proceeds on
January 1, 2016.
BACKGROUND
1)Purpose : The author states that AB 1705 will clarify what
a substantially complex project is as it relates to
retention proceeds in public works projects. In the event
that a project is deemed substantially complex, AB 1705
requires that details explaining the basis of the finding
be included in the bid documents.
In 2011, SB 293 (Padilla) limited the amount of retention
proceeds to 5% of the costs of the contract, unless a
project was substantially complex. According to the
author and the sponsors of AB 1705, soon thereafter, many
public entities, particularly school districts, started
adopting resolutions setting forth the methodology by
which ALL construction future projects will be designated
as substantially complex. The author states that this
practice is inconsistent with the original intent of SB
293 (Padilla), and unfairly exploits what was meant to be
a reasonable exemption to the law.
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2)Retention proceeds : In California and many other
states,<1> a public entity is entitled to withhold from
payment a specified amount so that the public entity can
maintain financial control of the project. In 2011,
special retention procedures were enacted into law in
California, and public entities cannot now retain more
than 5% of the costs of a contract, subject to the
"substantially complex" exception.<2>
Before this law passed limiting retention on public works
projects to 5%, the usual standard for public entities
was 10%, although this was not set by statute. The only
identified exception to the 5% retention limit is when a
public entity approves a finding that a project is
substantially complex during a properly noticed and
regularly scheduled public meeting prior to bidding the
project. In that case, retention proceeds may exceed 5%.
Whether a project is substantially complex for purposes
of requiring retention in excess of 5% must be analyzed
and approved on a project-by-project basis. The finding
and the designated retention amount must be included in
the project's bid documents. This law remains in effect
until January 1, 2016 and cannot be waived by agreement.
It should be noted that the 5% limit on retention
proceeds in Public Contract Code § 7201 does not limit a
public entity's ability to withhold funds for other
purposes, including withholding 150% of the value for
disputed work.
3)Overuse of the "substantially complex" exception :
According to the author and the supporters of AB 1705,
many local public entities, particularly school
districts, have circumvented existing law by adopting
resolutions containing boilerplate language deeming
essentially every school district project as a
substantially complex one.
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<1> 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.
<2> Public Contract Code § 7201
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For example, supporters furnished a sample resolution for
use by school districts in which substantially complex
projects are those which are, among other things, subject
to design approval by the State Architect (which happens
to be every school construction or modification project),
subject to higher safety standards than other public
works projects (any maintenance, construction or
modification done at school district property), and the
like.
In a specific instance, Newport Mesa Unified adopted a
resolution designating all of its school construction
projects as substantially complex ones because they are,
among other things, "designed to higher safety standard,
including seismic, fire protection and ADA compliance."
These resolutions are then routinely cited by the school
board in advance of the bid in order to form a basis to
support a 10% retention amount included on all of its
school construction projects.
4)Support : The sponsors of the bill complain that the
actions of public agencies have undermined the law, which
is intended to apply to all projects unless a project is
exceptionally unique, but the agencies and their
attorneys have instead turned this substantially complex
"exception" into the rule, and are routinely deeming
simple projects "substantially complex" in order to
withhold 10% instead of 5%. Supporters believe that AB
1705 will remedy this situation because it requires
public entities to explain the reasons why a project is
complex, as well as the project's retention rate.
5)Opposition : The opponents say that the construction
contract companies should be focusing solely on school
projects, where the substantially complex exception rule
has apparently been troublesome for construction
companies. They would prefer this approach to one that
seeks to define "substantially complex" by what is isn't
- which is a counterintuitive approach that will only
lead to additional litigation and further hinder the
decisions that local agencies can make on behalf of their
taxpayers and ratepayers.
6)Suggested amendment : In order to avoid another
contentious fight in a little more than a year from now
about retention proceeds, and the substantially complex
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exception to the 5% retention rule, the Committee or the
author should amend AB 1705 to delete or extend the
January 1, 2016 sunset clause that now exists in Public
Contract Code § 7201.
PRIOR/RELATED LEGISLATION
SB 293 (Padilla), Chapter 700, Statutes of 2011. Among
other things, prohibits a public entity from retaining more
than 5% of a contract price until final completion and
acceptance of a project, but allows retention of higher
amounts when a project is deemed "substantially complex."
SB 802 (Leno), 2009-2010 Session. Would have prohibited the
Department of General Services (DGS) from withholding more
than 5% of a contract price until final completion and
acceptance of the project. Would also have prohibited
retention proceeds from exceeding 5% percent of a payment
for all contracts entered into between an original
contractor and a subcontractor, and between all
subcontractors. (Vetoed)
SB 629 (Liu), 2009-2010 Session. Would have prohibited
withholding of retention proceeds in private works of
improvements from exceeding 5% of the amount otherwise due
under the contract. (Died on Senate Inactive File)
AB 396 (Fuentes), 2009-2010 Session. Would have reduced the
allowable retention proceeds on public works contracts to
5%. (Held in Assembly Appropriations)
SB 593 (Margett), Chapter 341, Statutes of 2008. Prohibits
the Department of Transportation from withholding retention
proceeds when making progress payments to a contractor for
works performed on a transportation project. Repealed
effective 1/1/2014.
SB 619 (Migden), 2007-08 Session. Would have prohibited
retention proceeds from exceeding 5% of a payment for all
contracts between a public entity and an original
contractor and a subcontractor, and between all
subcontractors. The bill would also have prohibited DGS
from withholding more than five percent of a contract price
until final completion and acceptance of the project. (Died
on the Assembly Floor)
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SUPPORT:
Air Conditioning & Refrigeration Contractors Association
Air Conditioning Sheet Metal Association
Air Conditioning Trade Association
American Subcontractors Association California
Associated Builders and Contractors - San Diego Chapter
Building Industry Credit Association
California Association of Sheet Metal & Air Conditioning
Contractors
California Chapter, American Fence Association
California Chapters of the National Electrical Contractors
Association
California Concrete Contractors Association
California Fence Contractors' Association
California Landscape Contractors Association
California Legislative Conference, Plumbing, Heating and
Piping Industry
California State Association of Electrical Workers
California State Council of Laborers
California State Pipe Trades Council
Flasher Barricade Association
Marin Builders Association
Plumbing-Heating-Cooling Contractors Association of
California
Sheet Metal and Air Conditioning Contractors' National
Association
State Building and Construction Trades Council
United Contractors
Western Electrical Contractors Association
Western State Council of Sheet Metal Workers
OPPOSE:
Association of California Water Agencies
El Dorado Irrigation District
La Puente County Water District
Newhall County water District
Pico Water District
Rowland Water District
FISCAL COMMITTEE: None
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