BILL ANALYSIS Ó AB 552 Page 1 ASSEMBLY THIRD READING AB 552 (O'Donnell) As Amended April 27, 2015 Majority vote ------------------------------------------------------------------- |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 | | | | | | | | | | | | ------------------------------------------------------------------- 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