BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 626|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
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THIRD READING
Bill No: AB 626
Author: Chiu (D) and Low (D), et al.
Amended: 8/19/16 in Senate
Vote: 21
SENATE JUDICIARY COMMITTEE: 7-0, 6/28/16
AYES: Jackson, Moorlach, Anderson, Hertzberg, Leno, Monning,
Wieckowski
SENATE APPROPRIATIONS COMMITTEE: 7-0, 8/11/16
AYES: Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen
ASSEMBLY FLOOR: 55-24, 6/3/15 - See last page for vote
SUBJECT: Public contracts: claim resolution
SOURCE: Author
DIGEST: This bill, until January 1, 2020, establishes, for
public works contracts entered into on or after January 1, 2017,
a claim resolution procedure by which a general contractor can
seek public agency review of the claim.
Senate Floor Amendments of 8/19/16 change the provision of the
bill that provides that a waiver of the rights granted by this
bill is void and contrary to public policy, provided, however,
that (1) upon receipt of a claim, the parties may mutually agree
to waive, in writing, mediation and proceed directly to the
commencement of a civil action or binding arbitration, as
applicable; and (2) a public entity in its public works
contracts may include dispute resolution provisions that comply
with this section, including the timeframes set forth herein,
and that prescribe additional reasonable and equitable terms
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regarding actions or procedures to be taken by the parties.
This clarifying amendment changes the wording in exception (2)
above and instead state that a public entity may prescribe
reasonable change order, claim, and dispute resolution
procedures and requirements in addition to the provisions of
this section, so long as the contractual provisions do not
conflict with or otherwise impair the timeframes and procedures
set forth in this section. The amendments also add a co-author.
ANALYSIS:
Existing law:
1) Provides that, in the event that a dispute arises between
the local public entity and the contractor whether the
conditions materially differ, or involve hazardous waste, or
cause a decrease or increase in the contractor's cost of, or
time required for, performance of any part of the work, the
contractor is not excused from any scheduled completion date
provided for by the contract.
2) Provides that the contractor retains any and all rights
provided either by contract or by law which pertain to the
resolution of disputes and protests between the contracting
parties.
3) Authorizes public agencies to make changes in construction
contracts for public improvements in the course of
construction, and requires the contractor to be paid for the
changes in accordance with the provisions of the contract
governing payment for changes in the work.
4) Authorizes, pursuant to contract terms and by mutual consent
of the contracting parties, any public agency to terminate,
amend, or modify any contract within the scope of such
authority; however, this provision does not apply to
contracts entered into pursuant to any statute expressly
requiring that contracts be let or awarded on the basis of
competitive bids.
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5) Prohibits, except as otherwise provided, a suit for money or
damages against a public entity on a cause of action for
which a claim is required to be presented until a written
claim therefor has been presented to the public entity and
has been acted upon or rejected by the board.
6) Prescribes a contract claims resolution process for
contracts entered into with a state agency and requires
arbitration of a claim, as defined.
7) Authorizes a claimant to initiate arbitration no later than
90 days after the date of personal or mail service on the
claimant of the final written decision by the appropriate
public agency department on the claim; however, this
limitation does not apply to any claim founded on any cost
audit, latent defect, warranty, or guarantee under the
contract.
8) Prohibits arbitration until the claimant pursues diligently
and exhausts, as to the claim, the required administrative
procedures set forth in the contract under which the claim
arose, as specified.
9) Authorizes a party to the contract to join in the
arbitration as a party, any supplier, subcontractor, design
professional, surety, or other person who has so agreed and
if the joinder is necessary to prevent a substantial risk of
the party otherwise being subjected to inconsistent
obligations or decisions.
This bill:
1) Requires, upon receipt of a claim, the 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. However, a
public entity and a contractor may, by mutual agreement,
extend the time period.
2) Requires the claimant to furnish reasonable documentation to
support the claim, and provides, if the public entity needs
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approval from its governing body to provide the claimant a
written statement identifying the disputed portion and the
undisputed portion of the claim, and the governing body does
not meet within the 45 days following receipt of a claim sent
by registered mail, the public entity up to three days
following the next duly publicly noticed meeting after the 45
day period, or extension expires to provide the claimant the
written statement.
3) 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.
4) Authorizes, if the claimant disputes the public entity's
written response, or if the public entity fails to respond to
a claim issued within the time prescribed, the claimant to
demand in writing an informal conference to meet and confer
for settlement of the issues in dispute, and, upon receipt of
a demand in writing sent by registered mail or certified
mail, return receipt requested, the public entity would be
required to schedule a meet and confer conference within 30
days for settlement of the dispute.
5) Requires, within 10 business days following the conclusion
of the meet and confer conference, if the claim or any
portion of the claim remains in dispute, the public entity to
provide the claimant a written statement identifying the
portion of the claim that remains in dispute and the portion
that is undisputed.
6) 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.
7) Requires the public entity and claimant to mutually agree to
a mediator within 10 business days after the disputed portion
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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 the claim.
8) Provides that if the parties cannot agree upon a mediator,
each party shall select a mediator and those mediators shall
select a qualified neutral third party to mediate the
disputed portion of the claim, and each party shall bear the
fees and costs charged by their respective mediators in
selecting the neutral mediator.
9) Provides that if mediation is unsuccessful, the parts of the
claim remaining in dispute would be subject to other
applicable claim resolution procedures.
10)Specifies that mediation includes any nonbinding process,
including, but not limited to, neutral evaluation or a
dispute review board, in which an independent third party or
board assists the parties in dispute resolution through
negotiation or by issuance of an evaluation, and any
mediation utilized must conform to the time frames provided
in this bill.
11)Requires the mediation conducted pursuant to this bill to
excuse any further obligation under Section 20104.4 to
mediate (meet and confer) after litigation has been
commenced, unless otherwise agreed to by the public entity
and the contractor in writing.
12)Does not preclude a public entity from requiring arbitration
of disputes under private arbitration or the Public Works
Contract Arbitration Program, if under this bill, mediation
does not resolve the parties' dispute.
13)Specifies that failure by the public entity to respond to a
claim from a contractor within the time periods described in
this bill or to otherwise meet the time requirements of this
bill would result in the entire claim deemed rejected and
provides that a claim that is denied by reason of the public
entity's failure to have responded to a claim or its failure
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to otherwise meet the time requirements of this section shall
not constitute an adverse finding with regard to the merits
of the claim or the responsibility or qualifications of the
claims.
14)Requires amounts not paid timely to bear interest at 7
percent per annum.
15)Authorizes, 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, the
contractor to present to the public entity a claim on behalf
of a subcontractor or lower tier subcontractor.
16)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, and requires
the subcontractor requesting that the claim be presented to
the public entity to furnish reasonable documentation to
support the claim.
17)Requires, within 45 days of receipt of that written request,
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.
18)Requires the text of the provisions provided under this bill
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.
19)Makes a waiver of the rights granted by this bill void and
contrary to public policy, provided, however, that upon
receipt of a claim, the parties may mutually agree to waive,
in writing, mediation and proceed directly to the
commencement of a civil action or binding arbitration as
applicable; and allows a public entity to prescribe
reasonable change order, claim, and dispute resolution
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procedures and requirements in addition to the provisions of
this section, so long as the contractual provisions do not
conflict with or otherwise impair the timeframes and
procedures set forth in this section.
20)Applies to contracts entered into on or after January 1,
2017 and sunsets on January 1, 2020.
21)Provides that nothing in the bill shall impose liability
upon a public entity that makes loans or grants available
through a competitive application process, for the failure of
an awardee to meet its contractual obligations.
Background
In general, public works refers to construction, alteration,
demolition, installation, or repair work (including maintenance)
of any public structure, building, road, or other improvement
done under contract and paid by public funds, or if private
funds are used, more than 50 percent of the square footage is
leased to a public entity. Because of this, there are laws
regarding many aspects of the construction projects to protect
the public's interest. Public works projects do not include
those done by a public agency with its own employees.
On public works projects, a public agency contracts with a
general contractor, who has submitted a bid or estimated cost to
provide the materials and services for the construction,
alteration, demolition, installation, or repair work. At times,
the cost of the materials and services is more than the general
contractor's bid due to changes in the project, which may be
attributed to inaccurate or incomplete project plans and
specifications, the public agency orders extra work to be
performed, or unexpected difficulties arise. These increases in
costs may be submitted to the public agency for payment.
Typically, unless a change order is issued by the public agency
or its legislative body or appropriate department approving the
increase in cost, the general contractor, who may not be
responsible for the underlying cause of the increase in costs
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but has accrued the expense for the sake of completing the
project, will be unable to resolve a claim dispute outside of
arbitration or civil action. Further, a subcontractor, who has
performed additional services or provided materials outside the
scope of the original contract with the general contractor but
necessary to the completion of the project, may be seeking
payment from the public agency. Delays in payment for the extra
work provided by the contractor or subcontractor may place the
contractor or subcontractor at financial risk with their
employees or continued work on the public work. Additionally,
the failure of the public agency to issue a change order or the
denial of claims has resulted in costly litigation for the
public agency, contractors, and subcontractors.
Comments
The author writes:
There is no law in place requiring agencies to pay claims,
in a timely manner, made by contractors for extra work
performed and approved by the agency, even when the public
agency acknowledges that it owes the contractor for work
performed. This places contractors and their workers in
difficult financial circumstances.
Furthermore, there is a lack in uniformity for disputing a
claim. In many cases, some public agencies have no
requirements to respond to a claim or respond to a claim
in a timely manner. The breakdown of communication
between the public agency and the contractor adds to the
burden on the contractor and meeting their payroll
obligations. AB 626, [. . .] creates a process that
requires agencies to respond to a contractor's claim, to
pay out portions of the work they acknowledge and agree
they owe the contractor, and to resolve disputed portions
of payment through non-binding mediation.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:YesLocal: Yes
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Page 9
According to the Senate Appropriations Committee there are
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. There are also
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. There are also additional costs to state
and local agencies for additional interest costs accrued on late
payments under the timelines prescribed in this bill.
According to the Senate Appropriations Committee there are
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. There are also
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. There are also additional costs to state
and local agencies for additional interest costs accrued on late
payments under the timelines prescribed in this bill.
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SUPPORT: (Verified8/12/16)
Air Conditioning Sheet Metal Association
Air-Conditioning & Refrigeration Contractors Association
Advanced Cable Solutions, Inc.
Architectural Glass& Aluminum
Associated General Contractors
Ayoob & Perry Plumbing Co.
Baker Electric
Big Sky Electric
California Chapters of the National Electrical Contractors
Association
California Legislative Conference of the Plumbing
California-Nevada Conference of Operating Engineers
California State Association of Electrical Workers
California State Pipe Trades Council
Collins Electrical Company, Inc.
Creative Shower Door Corp.
Cupertino Electric, Inc.
Electro Construction Corp.
Finishing Contractors Association of Southern California
Fuller Electric
Giroux Glass, Inc.
Heating and Piping Industry
International Union of Elevator Constructors
KBI Painting, Inc.
Mike Cox Electric Company, Inc.
Morrow-Meadows Corporation
Neal Electric Corp.
Neubauer Electric, Inc.
Northern California Allied Trades
Pacific Glazing Contractors
Painting and Decorating Contractors Association of Sacramento
Piping Industry Progress & Education Trust Fund
Pyramid Painting, Inc.
Roundtree Glass Company
Santa Barbara Glass Company
Schetter Electric, Inc.
Smith and Sons Electric, Inc.
State Building and Construction Trades Council, AFL-CIO
TNT Industrial Contractors, Inc.
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Wall and Ceiling Alliance
Western States Council of Sheet Metal Workers
44 individuals
OPPOSITION: (Verified8/21/16)
San Diego County Regional Airport Authority
ASSEMBLY FLOOR: 55-24, 6/3/15
AYES: Achadjian, Alejo, Bloom, Bonilla, Bonta, Brown, Burke,
Calderon, Campos, Chau, Chávez, Chiu, Chu, Cooley, Cooper,
Dababneh, Daly, Dodd, Eggman, Frazier, Cristina Garcia,
Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray,
Roger Hernández, Holden, Irwin, Jones-Sawyer, Levine, Linder,
Lopez, Low, McCarty, Medina, Mullin, Nazarian, O'Donnell,
Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas,
Santiago, Mark Stone, Ting, Weber, Wilk, Williams, Wood,
Atkins
NOES: Travis Allen, Baker, Bigelow, Brough, Chang, Dahle, Beth
Gaines, Gallagher, Grove, Hadley, Harper, Jones, Kim, Lackey,
Maienschein, Mathis, Mayes, Melendez, Obernolte, Olsen,
Patterson, Steinorth, Wagner, Waldron
NO VOTE RECORDED: Thurmond
Prepared by:Margie Estrada / JUD. / (916) 651-4113
8/22/16 20:38:06
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