BILL ANALYSIS Ó AB 552 Page 1 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. AB 552 Page 2 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. AB 552 Page 3 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 AB 552 Page 4 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 Page 5