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
AB 552
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