BILL ANALYSIS Ó
AB 552
Page 1
ASSEMBLY THIRD READING
AB
552 (O'Donnell)
As Amended April 27, 2015
Majority vote
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|Committee |Votes |Ayes |Noes |
| | | | |
| | | | |
|----------------+------+---------------------+---------------------|
|Accountability |9-0 |Salas, Lackey, | |
| | |Brough, Burke, | |
| | |Frazier, Beth | |
| | |Gaines, Irwin, | |
| | |Medina, Rodriguez | |
| | | | |
|----------------+------+---------------------+---------------------|
|Judiciary |10-0 |Mark Stone, Wagner, | |
| | |Alejo, Chau, Chiu, | |
| | |Gallagher, Cristina | |
| | |Garcia, Holden, | |
| | |Maienschein, | |
| | |O'Donnell | |
| | | | |
|----------------+------+---------------------+---------------------|
|Appropriations |17-0 |Gomez, Bigelow, | |
| | |Bloom, Bonta, | |
| | |Calderon, Chang, | |
| | |Daly, Eggman, | |
| | |Gallagher, Eduardo | |
| | |Garcia, Holden, | |
AB 552
Page 2
| | |Jones, Quirk, | |
| | |Rendon, Wagner, | |
| | |Weber, Wood | |
| | | | |
| | | | |
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SUMMARY: Provides that if a public contract contains a
consequential damages (CDs) clause it must specify a set amount.
Specifically, this bill:
1)Provides that a public works contract entered into on or after
January 1, 2016, that contains a clause requiring a contractor
to be responsible for CDs, is not enforceable unless the CDs
have been liquidated to a set amount and identified in the
public works contract.
2)Defines "public agency" for purposes of the above to include the
state, Regents of the University of California, a city, charter
city, county, charter county, district, public authority,
municipal utility, and any other political subdivision or public
corporation of the state.
3)Makes findings and declarations relating to the need for clear
and uniform guidelines relating to liquidated damages in public
contracts.
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 CDs resulting
from a delay of a nonperforming party.
FISCAL EFFECT: According to the Assembly Appropriations
Committee, no likely state fiscal impact, as it appears CDs
clauses are not used in state contracts.
AB 552
Page 3
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 CDs in public works contracts. These damages are
determined after the fact considering available evidence.
Specifically, the author states 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 CDs 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.
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.
AB 552
Page 4
This bill, as amended, would simply provide that if a public
contract contains a clause making the contractor liable for CDs,
the amount cannot be open-ended. This bill would not prevent a
public agency from seeking CDs, nor would it require a public
agency to include a CD clause in its contract. Rather, this bill
provides that if the public agency opts to include a CD clause in
the contract, then CDs must be liquidated at a set amount and
identified in the contract.
Analysis Prepared by: William Herms / A. &
A.R. / (916) 319-3600 FN: 0000303