BILL ANALYSIS
AB 2216
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Date of Hearing: May 4, 2010
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 2216 (Fuentes) - As Introduced: February 18, 2010
SUBJECT : CONSTRUCTION CONTRACTS: PAYMENT OF SUBCONTRACTORS
KEY ISSUES :
1)SHOULD SUBCONTRACTORS BE REQUIRED TO GIVE EARLIER NOTICE OF A
CLAIM AGAINST GENERAL CONTRACTORS FOR NON-PAYMENT ON PUBLIC
WORKS PROJECTS?
2)SHOULD THE NUMBER OF DAYS REQUIRED FOR A CONTRACTOR TO PAY A
SUBCONTRACTOR BE REDUCED FROM 10 TO 7 DAYS?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This bill, sponsored by the Associated General Contractors of
California (AGC), seeks to shorten the time period for
subcontractors to make claims against general contractors for
nonpayment. Supporters contend that limiting this time period
will help general contractors avoid the surprise of unexpected
claims by second and lower-tier subcontractors, as well as the
potential for double-payment, after the general contractor has
already paid first-tier subcontractors. Opponents of the bill,
including the American Subcontractors Association California,
contend that the bill unfairly changes longstanding law that is
intended to protect subcontractors who may lack knowledge that a
project is complete - the triggering event for the period in
which to assert claims. Opponents contend that the risk of
double payments by contractors should be balanced against the
risk of nonpayment to subcontractors, and argue that general
contractors have the power and information to best assess, limit
and bear that risk. The bill would also shorten time periods
for prompt payment of subcontractors from ten days to seven
days. This provision is uncontroversial.
SUMMARY : Revises procedures relating to surety bond claims and
prompt payment statutes on works of improvement. Specifically,
this bill :
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1)Reduces the time required for a prime contractor or
subcontractor to pay any subcontractor, from 10 days to no
later than seven days after receipt of each progress payment
for satisfactory work performed.
2)Requires that a surety bond lien claim must be filed prior to
completion of a public works project or recordation of a
notice of completion.
EXISTING LAW :
1)Requires that, for private and public works of improvement a
prime contractor or subcontractor shall pay to any
subcontractor, not later than 10 days after receipt of each
progress payment, unless otherwise agreed to in writing, the
respective amount allowed the contractor on account of the
work performed by the subcontractors, to the extent of each
contractor's interest therein, as prescribed. (Bus. & Prof.
Code section 7108.5; Public Contract Code section 10262.5(a).)
2)Requires a claimant to provide a 20-day public work
preliminary bond notice under specified circumstances. If the
proper notice is not given, a claimant may enforce a claim by
giving written notice to the surety and the bond principal
within 15 days after recordation of a notice of completion.
If no notice of completion has been recorded, a claimant has
75 days after completion of work to give the required written
notice. (Civil Code section 3252.)
COMMENTS : In support of the bill, the author states:
With California's economy and cash flow continuing to
tighten, it is important for contractors to keep close
controls on payments, moneys owed, as well as potential
disputes. In private works, any person who provides
construction services or materials to a construction
project has the right to file a lien on the property if
they are not paid; however, prior to filing the lien, a 20
day preliminary lien notice must be filed with the owner
and general contractor identifying the contractor and
notifying the owner and general contractor of the potential
lien claim in the event payments are not paid for work
performed or materials provided. In public works, instead
of a lien claim, there are claims that can be made against
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the surety bond, referred to as a bond claim.
The 20 day notice applies in public works, but provided
that if the notice is not filed the contractor is not
penalized and can make a claim up to 75 days after the
notice of completion. This area of the law has been revised
to state that at a minimum, the bond claim must be filed
before the final notice of completion. This change avoids
general contractors from being hit by "surprise" claims
from second and third tier contractors at a time when all
of the funds have already been paid to higher tier
subcontractors.
The bill also reduces the time period a general contractor
has to pay his or her subcontractor after the general has
been paid a progress payment from the owner. This time
period is reduced from 10 to 7 days. With cash flow
continuing to be an issue, especially in a tight economy,
it is helpful to ensure that subcontractors receive their
progress payments in a timely manner.
Controversy Regarding Proposed Change To Time Period For
Subcontractors To Give Notice Of Potential Claims Against
Payment Bonds - Who Should Bear The Risk Of Nonpayment or Double
Payment Of Subcontractors? This bill is sponsored by the
Associated General Contractors of California (AGC) and supported
by other large contractor associations. It has generated
controversy among subcontractors by proposing to change the time
period by which subcontractors are allowed to give notice of
potential claims against payment bonds that are required to be
posted in specified public works projects.
Background On Payment Bond Claim Procedure: In public works
projects, any person who provides construction services or
materials to a construction project has the right to file a
claim against the payment bond if they are not paid. Since 1994
the law has been that in order to enforce a claim upon a payment
bond in a public works project the subcontractor or materials
supplier who wishes to make a claim is to give a 20-day
preliminary bond notice to the owner and general contractor,
identifying the subcontractor and notifying the owner and
general contractor of the potential claim. This must be done
within 20 days from first furnishing labor or materials.
Recognizing that this 20-day public works preliminary bond
notice is not always given by subcontractors, the law provides
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that a claimant may nevertheless enforce a claim by giving
written notice to the surety and the bond principal, as
specified, within 15 days after recordation of a notice of
completion. Recognizing that owners do not always record the
required notice of completion, the law provides that if no
notice of completion has been recorded the time for giving
written notice to the surety and the bond principal is extended
to 75 days after completion of the work of improvement.
Proposed Shorter Time Period For Subcontractor Claims: This bill
would substantially change those notice periods for projects
completed after the end of this year (regardless of when those
projects commenced or whether the subcontractor gave the
preliminary bond notice within 20 days of beginning work). For
projects completed next year and thereafter, subcontractors
would no longer have the ability to give notice of their claims
against a payment bond within 15 days after recordation of a
notice of completion or 75 days after completion of the project
if no notice of completion is recorded. Instead, they would be
required to give this notice of claim prior to either
recordation of a notice of completion or completion of the
project (presumably, as under current law, if no notice of
completion has been recorded.)
The author argues that this change "avoids general contractors
from being hit by 'surprise' claims from second and third tier
contractors at a time when all of the funds have already been
paid to higher tier subcontractors." AGC adds:
The general contractor is ultimately responsible for all
payments to subcontractors on the job. If the first tier
subcontractor fails to pay their subcontractor or material
supplier unbeknownst to the general contractor, and all
monies are paid out on the project on the final notice of
the completion date, then the general contractor ends up
having to pay twice for the same work performed. The
purpose of preliminary notices [is] to inform the owner and
general contractor who may be potentially owed money due to
work performed on the job. It is not unusual to have tens
or hundreds of contractors on a large project, and
therefore, it is not always possible to know who a first
tier subcontractor has contracted with that may have a bond
claim right. The current law creates an inequity for the
general contractor.
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The central modification that AB 2611 makes is to require
that a claim against the bond must be made at the time of
or prior to the notice of completion. The reason for this
timing change is that should there be a claim by an
"unknown" subcontractor; the general contractor will be in
a position to instruct the first tier subcontractor to pay
the subcontractor or supplier before retention proceeds are
paid. Under the current rule, a general contractor would
pay all of the subcontractors in full believing they have
paid their subcontractors, when in fact, they have not paid
the subcontractors below them who the subcontractor hired.
The California Legislative Conference of the Plumbing, Heating
and Piping Industry and the National Electrical Contractors
Association support this bill, writing: "AB 2216 represents a
good faith effort between members of the construction industry
in California to agree on terms and conditions related to
construction contracts, bonds and payment periods. With
California's economy and cash flow continuing to tighten, it is
important for contractors to keep close controls on payments,
money owed, as well as potential disputes. This measure will
resolve payment related issues and help struggling contracts
with cash flow problems. The solution is a balanced approach
that will expedite progress payments and ensure that anyone that
provides material and labor to public works projects get paid
for work performed and approved when they provide notice of that
work prior to the job being completed."
The Law This Bill Would Change Was Apparently Sponsored By The
Same Contractor Association That Now Sponsors This Bill, And
Which Has Previously Sought Unsuccessfully To Shorten This Claim
Period. The statute at issue here, Civil Code section 3252 was
enacted by AB 3357 of 1994, sponsored by the Associated General
Contractors of California. Prior to that bill, subcontractors
had a longer period (90 days) in which to assert claims.
According to committee reports, the argument for that bill
(current law) was that it would allow general contractors to
avoid being surprised by unexpected and late claims that cause
problems for general contractors who may have disbursed all
funds under the contract under the belief that all
subcontractors have been paid. Then as now a general contractor
can protect itself by issuing payment checks jointly payable to
the higher and lower-tier subcontractors; it was believed that
by requiring a 20-day preliminary bond notice contractors would
be able to make use of the joint-check option because they would
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have notice that lower-tier subs were on the job.
Nevertheless, since the enactment of that law AGC has regularly
sought without success to eliminate or shorten the time period
for claims by subcontractors. (See, e.g., AB 901 (Goldsmith) of
1995; AB 2806 (Wyland) of 2004; AB 411 (Yee) of 2005; SB 738
(Calderon) of 2007; AB 396 (Fuentes) of 2009.) The last of
these had a provision like the current bill; that measure was
not opposed by subcontractors, and indeed was supported by the
Landscape Contractors who oppose the current bill, presumably
because it had other provisions that subcontractors believed
made it worthy overall.
Opposition From Subcontractor Groups. The shortening of the
claim period is alarming to certain subcontractor groups who
have filed opposition to the bill, contending that any risk of
double-payment by contractors must be balanced against the risk
of nonpayment to subcontractors. To the extent contractors have
such risk, opponents argue, they are in the best position to
bear the risk because they hire and supervise subcontractors and
suppliers.
The American Subcontractors Association California, Inc. (ASAC)
states:
Section 3252 (b) of the bill eliminates all bond claims on
all projects completed before this year ends provided the
subcontractor failed, even inadvertently, to submit a
preliminary bond notice within 15 days of the owner or
general contractor recording a Notice of Completion (NOC),
or within 75 days after completion if no NOC was recorded.
This is a decades old public policy that acknowledges that
the subcontractor may not know that a project is entirely
complete due to the general contractor's failure to record
a NOC. The 75 day grace period was therefore established by
the Legislature to enable the subcontractors to get paid
for their work. However, it is totally inconsistent with
section (c) of the bill, creating a double standard and
dashing the current subcontractor protections in law.
Section 3252 (c) of the bill denies subcontractors relief
and payment for their work if they fail, even
inadvertently, to notify parties about their claim prior to
the date of completion. This is a huge problem because
suppliers and subcontractors, particularly early finishing
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trades, have no way of knowing when the project will be
complete and whether the project is actually complete; they
don't drive by and inspect it daily. This is precisely why
the current, equitable law has been in place for so long
and should not be curtailed.
ASAC submits that general contractors should know their
subcontractors and suppliers as they supervise their
projects and should already know whether their workmanship
has been approved and entitled to payment. Construction
management is the GC's obligation and these claims should
not surprise the GCs. Cutting off the subcontractors'
claim rights by some less than obvious, indiscernible and
arbitrary date (other than recordation date) is simply
unfair and reverses California's long standing equitable
statutory public policy.
At a minimum, the bill should be amended to provide that
project owners should be required to serve a Notice of
Completion to all subcontractors and material suppliers who
have served their Preliminary Lien Notice. In that way,
they can at least be notified that the project is done and
they can then submit their claims for payment.
The California Landscape Contractors Association (CLCA) has
taken an "oppose unless amended" position on AB 2216. CLCA
agrees with the bill's sponsors that there is a need to more
quickly identify claims against a surety bond and avoid
situations where subcontractors unknown to the prime contractor
file late claims for nonpayment. However, it also concurs with
opponents who correctly assert that second and lower tier
subcontractors often have no knowledge of when a project is
completed and would likely miss the very short time frame
established in the current bill for filing a claim against the
prime contractor's surety bond.
CLAC states, "Fortunately, there is a simple solution that
treats both sides fairly. CLCA proposes that each first tier
subcontractor be required to notify the prime contractor of all
lower tier subcontractors it brings to the job site and that the
prime contractor notify all subcontractors at least 10 days
prior to the date that it anticipates recording a notice of
completion. In this way, the prime contractor knows who has
worked on the project and lower tier subcontractors are given a
reasonable notice and opportunity to file a claim against the
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prime contractor's surety bond if not paid for work completed
and accepted. If the first tier subcontractor failed to notify
the prime contractor, any claims for nonpayment from lower tier
subcontractors would be made against the first tier
subcontractor's surety bond. With these amendments, or any
similar approach that provides lower tier subcontractors with
reasonable notice of when a project is nearing completion, CLCA
would withdraw its opposition."
No Controversy Regarding Reducing Time Period To 7 Days After
Receipt of Progress Payment . This bill also reduces the time
required for a prime contractor or subcontractor to pay any
subcontractor, to no later than 7 days after receipt of each
progress payment. In support of the bill, the author writes:
"With cash flow continuing to be an issue, especially in a tight
economy, it is helpful to ensure that subcontractors receive
their progress payments in a timely manner."
No opposition has been received to this provision of the bill,
although ASAC states "while it may comfort some to get paid
Friday instead of Monday, they are insufficient to warrant
ASAC's support of this bill when considering the above
deficiencies and unfair provisions."
REGISTERED SUPPORT / OPPOSITION :
Support
Associated General Contractors of California (sponsor)
Associated General Contractors of San Diego
California Legislative Conference of the Plumbing, Heating and
Piping Industry
Construction Employers Association
National Electrical Contractors Association - California chapter
Opposition
American Subcontractors Association California, Inc
California Landscape Contractors Association
Construction Industry Legislative Council
Union Roofing Contractors Association
Analysis Prepared by : Kevin G. Baker and Cheryl Lema / JUD. /
(916) 319-2334
AB 2216
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