BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
AB 626 (Chiu) - Public contracts: claim resolution
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|Version: June 8, 2016 |Policy Vote: JUD. 7 - 0 |
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|Urgency: No |Mandate: Yes |
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|Hearing Date: August 1, 2016 |Consultant: Jolie Onodera |
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This bill meets the criteria for referral to the Suspense File.
Bill
Summary: AB 626 would, until January 1, 2020, establish a
claims resolution process for public works contracts entered
into on or after January 1, 2017, by which a general contractor
may seek a public entity's review of the claim.
Fiscal
Impact:
State agencies : Potential costs (General Fund) to state
agencies not specifically exempted from the bill's provisions,
including the University of California and the California
State University, that engage in public works contracts for
claims review and resolution, which will result in additional
administrative costs to review, evaluate, and respond to
claims within 45 days, and for mandated mediation. State
agencies are currently not subject to any statutory timelines
for claims review and resolution, and unresolved claims are
subject to arbitration. Staff notes the state agencies with
numerous public works contracts and/or large-scale projects
(i.e., CalTrans, DWR, DGS, High Speed Rail Authority) have
been exempted from the bill's provisions.
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Local agencies : Potentially major state-reimbursable costs in
the millions of dollars (General Fund) to local agencies
engaged in public works projects to the extent this new
process results in higher administrative costs, including any
increase in administrative costs incurred under the existing
process for resolution of claims under $375,000.
Interest : Additional costs to state and local agencies for
additional interest costs accrued on late payments under the
timelines prescribed in this bill.
Background: Existing law prescribes various requirements regarding the
formation, content, and enforcement of state and local public
contracts. Existing law applicable to state public contracts
generally requires that the resolution of claims related to
those contracts be subject to arbitration. Existing law for
local agency public works requires all claims made for work
arising out of the contract, but not expressly provided for in
that contract, that are $375,000 or less to first be resolved
through administrative resolution procedures. However, if the
contract provides for arbitration, the claim will have to be
arbitrated according to express arbitration statutes. The
arbitration statutes apply to both local agency and state agency
public work contracts.
This bill prescribes a new claims resolution process by which a
contractor can submit a claim to a public entity.
Proposed
Law: This bill would establish a claims resolution process for
public works contracts entered into on or after January 1, 2017,
as follows:
Precludes any other claim resolution provision and applies to
any claim by a contractor in connection with a public works
project.
Provides the following definitions:
o "Claim" means a separate demand by the contractor
sent by registered or certified mail for one or more of
the following: (a) a time extension, including, without
limitation, for relief from damages or penalties for
delay assessed by a public entity under a contract for a
public works project; (b) payment by the public entity of
money or damages arising from work done by, or on behalf
of, the contractor pursuant to the contract for a public
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works project and payment for which is not otherwise
expressly provided or to which the claimant is not
otherwise entitled; or (c) payment of an amount that is
disputed by the public entity;
o "Contractor" means any type of contractor subject to
the Contractor's State License Law who has entered into a
direct contract with a public entity for a public works
project;
o "Public entity" means, without limitation, except as
provided, a state agency, department, office, division,
bureau, board, or commission, the California State
University, the University of California, a city,
including a charter city, county, including a charter
county, city and county, including a charter city and
county, district, special district, public authority,
political subdivision, public corporation, or nonprofit
transit corporation wholly owned by a public agency and
formed to carry out the purposes of the public agency;
o "Public entity" shall not include the following:
§ The Department of Water Resources (DWR),
as to any project under its jurisdiction.
§ The Department of Transportation
(CalTrans), as to any project under its
jurisdiction.
§ The Department of Parks and Recreation, as
to any project under its jurisdiction.
§ The Department of Corrections and
Rehabilitation (CDCR), with respect to any project
under its jurisdiction, as specified.
§ The Military Department, as to any project
under its jurisdiction.
§ The Department of General Services (DGS)
as to all other projects.
§ The High-Speed Rail Authority.
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o "Public works project" means the erection,
construction, alteration, repair, or improvement of any
public structure, building, road, or other public
improvement of any kind;
o "Subcontractor" means any type of contractor subject
to the Contractor's State License Law who either is in
direct contract with a contractor or is a lower tier
subcontractor.
Upon receipt of a claim, requires a public entity to which the
claim applies to conduct a reasonable review of the claim and,
within a period not to exceed 45 days, provide the claimant a
written statement identifying what portion of the claim is
disputed and what portion is undisputed. Authorizes a public
entity and a contractor to, by mutual agreement, extend the
45-day time period.
If the public entity needs approval from its governing body to
provide the claimant the written statement, and the governing
body does not meet within the 45 days or within the mutually
agreed to extension of time following receipt of a claim sent
by registered mail or certified mail, return receipt
requested, provides the public agency up to three days
following the next duly publicly noticed meeting of the
governing body after the 45-day period, or extension, expires
to provide the claimant a written statement identifying the
disputed portion and the undisputed portion.
Requires any payment due on an undisputed portion of the claim
to be processed and made within 60 days after the public
entity issues its written statement; if the public entity
fails to issue a written statement, the claim would be deemed
rejected in its entirety.
Requires any payment due on an undisputed portion of the claim
to be processed and made within 60 days after the public
entity issues its written statement, and any disputed portion
of the claim, as identified by the contractor in writing,
would be required to be submitted to nonbinding mediation,
with the public entity and the claimant sharing the associated
costs equally.
Requires the public entity and claimant to mutually agree to a
mediator within 10 business days after the disputed portion of
the claim has been identified in writing, and, if the parties
cannot agree upon a mediator, each party would select a
mediator and those mediators would select a qualified neutral
third party to mediate with regard to the disputed portion of
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the claim.
Requires each party to bear the fees and costs charged by its
respective mediator, as specified. If mediation is
unsuccessful, requires the parts of the claim remaining in
dispute to be subject to other applicable claim resolution
procedures.
Unless otherwise agreed to by the public entity and the
contractor in writing, requires the mediation conducted
pursuant to this bill to excuse any further obligation to
mediate after litigation has been commenced.
Does not preclude a public entity from requiring arbitration
of disputes under private arbitration or the Public Works
Contract Arbitration Program, if mediation does not resolve
the parties' dispute.
Specifies that failure by the public entity to respond to a
claim from a contractor within the time periods described
would result in the claim being deemed rejected in its
entirety. Provides that a claim denied by reason of a public
entity's failure to have responded to a claim, or its failure
to otherwise meet the time requirements shall not constitute
an adverse finding with regard to the merits of the claim or
the responsibility or qualifications of the claimant.
Requires amounts not paid in a timely manner to bear interest
at 7 percent per annum.
If a subcontractor or a lower tier subcontractor lacks legal
standing to assert a claim against a public entity because
privity of contract does not exist, authorizes the contractor
to present to the public entity a claim on behalf of a
subcontractor or lower tier subcontractor.
Authorizes a subcontractor to request in writing, either on
his or her own behalf or on behalf of a lower tier
subcontractor, that the contractor present a claim for work
which was performed by the subcontractor or by a lower tier
subcontractor on behalf of the subcontractor.
Requires the subcontractor requesting that the claim be
presented to the public entity to furnish reasonable
documentation to support the claim.
Within 45 days of receipt of that written request, requires
the contractor to notify the subcontractor in writing as to
whether the contractor presented the claim to the public
entity and, if the original contractor did not present the
claim, provide the subcontractor with a statement of the
reasons for not having done so.
Requires the text of the provisions provided under this bill
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or a summary of it to be set forth in the plans or
specifications for any public works project that may give rise
to a claim under this bill.
Makes a waiver of the rights granted by this bill void and
contrary to public policy, subject to specified conditions.
Provides that nothing in this bill shall impose a liability
upon a public entity that makes loans or grants available
through a competitive application process, for the failure of
the awardee to meet its contractual obligations.
Sunsets the bill's provisions on January 1, 2020.
Related
Legislation: AB 1347 (Chiu) 2015 was substantially similar to
this bill when it was heard by this Committee, with the
exception that the exemption for the Department of
Transportation was not provided for in AB 1347 (but was later
amended to exempt CalTrans prior to the bill being presented to
the Governor). This bill was vetoed by the Governor with the
following message:
I am returning Assembly Bill 1347 without my signature. This
bill creates, for three years, a new dispute resolution process
under which contractors could seek public agency review of
claims that arise during public works projects.
Contractors who perform work for public agencies should be paid
promptly. Swift resolution of payment disputes is in the best
interest of contractors, workers, and the public agencies that
are charged with efficiently managing taxpayer funds. I'm not
convinced, however, that the procedures contemplated by this
bill are an improvement over current law.
I am committed, however, to ensuring timely payment for work
ordered by public agencies. In the interest of furthering that
goal I am directing my departments to immediately work with
industry partners and the proponents of this bill on ways of
improving our prompt payment policies.
Prior Legislation: AB 2471 (Frazier) 2014 would have required
state and local public entities engaged in a public works
contract awarded to the lowest bidder to promptly issue change
orders when extra work was required of the contractor or
subcontractor. This bill stalled in this Committee without a
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hearing.
AB 2096 (Miller) 2010 would have allowed a public agency and a
contractor to mutually agree to resolve a claim through
independent arbitration. This bill failed passage in the
Assembly Committee on Judiciary.
Staff
Comments: By requiring state agencies not otherwise exempted to
adhere to the claims resolution process specified in this
measure, the provisions of this bill could result in significant
personnel costs (General Fund) for evaluation, response,
coordination, and oversight activities related to submitted
claims requiring action within the prescribed timeframes of this
measure. Although the bill exempts specified state agencies
involved with numerous public works projects and/or large-scale
projects (i.e., CalTrans, DWR, DGS, High Speed Rail Authority),
this bill still applies its requirements upon all other public
entities not specifically exempted, including but not limited to
the UC and California State University. The number of claims
potentially submitted by contractors for public works projects
entered into by non-exempted public entities cannot be known
with certainty, and as a result, the costs are unknown, but
potentially significant.
In addition to one-time costs to rewrite specifications, policy,
construction and oversight manuals, forms, and provide training,
ongoing resource needs could be required to address the workload
involved with submitted claims.
This bill requires that the "associated cost" of mediation to be
shared equally between the public entity and the claimant. In
the absence of a definition, however, it is unclear to what
extent "associated costs" would extend or what costs it would
include.
By requiring local agencies to adhere to the claims resolution
process specified in this measure, this bill creates a
state-mandated local program, potentially resulting in major
state-reimbursable costs in the millions of dollars (General
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Fund) through the three-year operative period to local agencies
engaged in public works projects. While the magnitude of costs
to local agencies cannot be estimated with certainty, given the
volume of local public works projects and claims subject to this
resolution process, costs are potentially substantial.
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