BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     AB 552


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          Date of Hearing:  April 15, 2015


           ASSEMBLY COMMITTEE ON ACCOUNTABILITY AND ADMINISTRATIVE REVIEW


                                  Rudy Salas, Chair


          AB 552  
          (O'Donnell) - As Amended March 26, 2015


          SUBJECT:  Public works contracts:  damages


          SUMMARY:  Requires public agencies to identify and include  
          specified damages within a public works contract beginning  
          January 1, 2016.  Specifically, this bill:


          1)Requires damages from a nonperforming party to be liquidated  
            and included in the contract and that all such damages must be  
            reasonable and provable, otherwise all damages shall not be  
            recoverable against the nonperforming party.


          2)Prohibits a public agency from requiring a contractor to be  
            responsible for consequential damages of any sort unless these  
            damages have been liquidated and included in the contract  
            upfront.


          3)Defines a "public agency" as the Regents of the University of  
            California, a city, charter city, county, charter county,  
            district, public authority, public agency, municipal utility,  
            or any other political subdivision or public corporation of  
            the state.









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          EXISTING LAW provides for liquidated damages to be generally  
          included in a public works contract.  Existing law does not  
          prohibit a public agency from including unspecified  
          consequential damages resulting from a delay of a nonperforming  
          party.


          FISCAL EFFECT:  Unknown


          COMMENTS:  When a public agency enters into a contract for a  
          public works project with a contractor, the agency generally  
          includes provisions for charging the contractor for damages due  
          to delays or nonperformance of the contract. These "liquidated  
          damages" are specified within the contract and agreed to upon  
          signing of the contract. 


          According to the author, an unknown but apparently small number  
          of public agencies (there are over 2,000 cities, counties and  
          special districts across the state) have begun to include  
          unanticipated and unspecified "consequential damages" in public  
          works contracts. These damages are determined after the fact  
          considering available evidence. 


          Specifically, the author asserts that the City and County of San  
          Francisco, the San Francisco Public Utilities Commission, the  
          San Francisco Metropolitan Transportation Agency, and the Los  
          Angeles World Airports, among others, have attempted to create  
          contracts that include undefined consequential damages for  
          project delay in the terms and conditions that contractors must  
          accept.  While some of these organizations have since reversed  
          their decision to include these provisions in their contracts  
          due to difficulty finding contractors willing to agree, others  
          have not.










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          Contractors argue that having a measurable penalty is extremely  
          important for insurers providing surety bonds for projects.   
          Contractors will generally pay periodic premiums to a surety  
          company in exchange for providing a guarantee to anyone hiring  
          the contractor that the surety company will pay if the  
          contractor fails to meet their contractual obligations.  In  
          order to properly provide this guarantee in the form of a surety  
          bond, the surety company must assess the risk involved in any  
          given contract based on a number of factors, including the track  
          record of the contractor, the premium they receive for their  
          service, and the damages they might incur if the contractor  
          fails.  


          The author contends this bill reduces the cost of public works  
          projects by requiring public agencies to specify all potential  
          damages associated with project delays in the contract.  This  
          requirement will reduce the cost of insuring construction  
          projects; increase the number of contractors that can afford to  
          compete for public contracts; and, reduce the risk for  
          subcontractors hired by prime contractors.


          REGISTERED SUPPORT / OPPOSITION:




          Support


          Air Conditioning & Refrigeration Contractors Association


          Air Conditioning Sheet Metal Association


          California Chapters of the National Electrical Contractors  
          Association








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          California Concrete Contractors Association


          California Legislative Conference of the Plumbing, Heating and  
          Piping Industry


          California Surety Federation


          Construction Employers' Association


          Finishing Contractors Association of Southern California


          United Contractors




          Opposition


          None on file




          Analysis Prepared by:William Herms / A. & A.R. / (916) 319-3600















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