BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 2216 (Fuentes)
As Amended May 11, 2010
Hearing Date: June 29, 2010
Fiscal: No
Urgency: No
TW:jd
SUBJECT
Works of Improvement
DESCRIPTION
This bill would reduce the time required for a general
contractor or subcontractor to pay a subcontractor, to no later
than seven days of receipt of each progress payment. This bill
would also revise the timing requirements for a subcontractor to
file a surety claim.
BACKGROUND
In public works projects, it is not uncommon for contractors to
hire various subcontractors, which in turn hire various other
subcontractors to complete the project. This has the effect of
creating various tiers of subcontractors. Tier 1 would be
comprised of the first subcontractors hired by the original
contractor, and tier 2 would be comprised of subcontractors
hired by the tier 1 subcontractors. Each additional
subcontractor hired may be unknown to the original contractor.
Upon completion of the project, there may exist subcontractors
hired under additional tiers that have not been paid by the
subcontractor who hired them. Subsequently, when the original
contractor pays out on all labor and materials utilized for the
project, the original contractor may have to spend additional
money to pay the unpaid subcontractor.
In order to create a system by which the original contractor is
made aware of the existence of potential claims by additional
subcontractors, the Legislature enacted various statutes
requiring the additional subcontractors to provide notice to the
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original contractor. The initial notice submitted by the
subcontractors is the 20-day preliminary notice. If the 20-day
preliminary notice is not served by the subcontractor, the
subcontractor may still make a claim against the public works'
surety bond for payment.
Prior to 1995, California followed the federal model for
preliminary notice deadlines under the Miller Act (40 U.S.C.
3131-3134) whereby subcontractors had 90 days from the date on
which the claimant furnished the last labor, services,
equipment, or materials for which such claim was made to submit
a preliminary notice. AB 3357 (Goldsmith, Ch. 974, Stats.
1994) reduced the 90-day preliminary notice requirement to 20
days. AB 3357 was amended prior to enactment to include a
safeguard for bond claimants whereby, in the event the
subcontractors failed to submit the 20-day preliminary notice,
the claimant could still submit a bond claim within 15 days of
recordation of the notice of completion, or, if the notice of
completion was not recorded, within 75 days of completion of the
project.
AB 396 (Fuentes, 2009) would have required a subcontractor, who
had failed to submit a 20-day preliminary notice, to give
written notice to the surety and the bond principal before the
completion of the public works project or recordation of a
notice of completion in order to enforce a claim based on labor
or services rendered to a public works project. This bill was
held under submission in the Assembly Appropriations Committee.
SB 802 (Leno, 2009), among other things, contained provisions
that would have reduced the time required for an original
contractor or subcontractor to pay any subcontractor from ten
days to no later than seven days of receipt of each progress
payment and would have revised the ability of subcontractors to
file bond claims. This bill was vetoed for reasons related to
other parts of that bill regarding reducing the amount a public
entity could retain from payments to general contractors.
This bill, sponsored by Associated General Contractors of
California, the Construction Employers Association, and the
National Electric Contractors Association, would provide for the
same reduction in payment time as proposed by SB 802. This bill
also would provide new limitations on the ability of a
subcontractor on public works projects to make claims against
the surety bond.
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CHANGES TO EXISTING LAW
1. Existing law requires a general contractor or subcontractor
to make a progress payment to a subcontractor no later than
ten days of receipt of each progress payment. (Bus. & Prof.
Code Sec. 7108.5; Pub. Contract Code Sec. 10262; Pub. Contract
Code Sec. 10262.5.)
This bill would reduce the number of days from ten days to
seven days within which a general contractor or subcontractor
is required to make a progress payment to a subcontractor.
2. Existing law defines a "preliminary 20-day notice" to mean
a written notice from a claimant that was given prior to the
assertion of a claim against a payment bond, or the filing of
a stop notice on public work. (Civ. Code Sec. 3098.)
Existing law requires a subcontractor to submit a preliminary
20-day notice to the general contractor and public agency no
later than 20 days after the subcontractor has first furnished
labor, services, equipment, or materials to the jobsite.
(Civ. Code Secs. 3098(a), 3252(a).)
Existing law provides that if the 20-day preliminary notice is
not given, the claimant is not precluded from giving notice at
any time thereafter, but claims against a payment bond can
only be made for labor, services, equipment, or materials
rendered within 20 days of the services of the preliminary
notice. (Civ. Code Sec. 3098(d).)
Existing law provides that, in the event the 20-day
preliminary notice was not given, the subcontractor may still
enforce a claim against the surety bond by submitting a bond
claim within 15 days after recordation of the notice of
project completion or 75 days after project completion if no
notice of completion is recorded. (Civ. Code Sec. 3252(b).)
This bill , as applied to public works projects completed
before December 31, 2010, would continue the existing
provisions for bond claims made by a subcontractor in the
event a 20-day preliminary notice was not served.
This bill , as applied to public works projects completed after
January 1, 2011, would require a subcontractor, who failed to
give the 20-day preliminary notice, to submit a written claim
against the surety bond prior to the completion or recordation
of notice of completion of the project, whichever is later.
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This bill also would require every project entity in
connection with the public works project to provide written
notice of pending completion of the project to all
subcontractors who have submitted the 20-day preliminary
notice.
COMMENT
1. Stated need for the bill
The author writes:
With California's economy and case 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 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 law has been revised to state 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.
2. Legislative history of preliminary notice and claims against
surety bonds
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In 1994, AB 3357 (Goldsmith, Ch. 974, Stats. 1994) reduced the
amount of time within which a subcontractor had to submit a
preliminary notice from 90 days to 20 days. The sponsor of that
bill, Associated General Contractors of California (AGCC) (the
same sponsor as this bill), claimed that 90 days was too long
for stray claims to be submitted by subcontractors because the
general contractors, in wrapping up the job, would have already
distributed job funds.
This committee required an amendment to AB 3357 to protect
unsophisticated laborers and materials suppliers who were
unaware of mechanic's lien procedures. The amendment provided
that subcontractors who failed to submit the 20-day preliminary
notice could still make a claim on the surety bond if they
submitted a surety claim within 15 days after recordation of
notice of completion or 75 days if no notice of completion is
recorded. The sponsor, AGCC, agreed to this amendment to
protect the rights of these laborers and materials suppliers.
In 2009, SB 802 (Leno, 2009) contained provisions similar to
this bill and would have reduced the time required for an
original contractor or subcontractor to pay any subcontractor
from ten days to no later than seven days of receipt of each
progress payment and would have revised the ability of
subcontractors to file bond claims. SB 802 was viewed by
contractors and subcontractors as a compromise of various issues
and the overall package was seen to be beneficial to both sides.
This bill was vetoed for other reasons related to different
parts of that bill regarding reducing the amount a public entity
could retain from payments to general contractors.
Now, AGCC wants to limit the ability of subcontractors and
materials suppliers to submit bond claims. AGCC argues that
this bill contains the same provisions as SB 802 for payment and
surety claim deadlines. While it is true that SB 802 contained
these provisions, SB 802 contained additional provisions that
were favorable to subcontractors, which this bill does not.
Opponents argue that SB 802 was a package of negotiated items.
This bill is more limited and focuses primarily on limiting the
time for which subcontractors may submit bond claims to before
completion of the project or before the notice of completion is
recorded. Opponents of this bill note that many times the
notice of completion is not recorded, requiring the
subcontractors to guess at when they needed to submit a bond
claim. It should be noted that other states have similar
preliminary notice and bond claim provisions with deadlines
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ranging from 45 days to 90 days. Given the history of this
statute and the desire to protect unsophisticated
subcontractors, the provisions of this bill appear to be
contrary to legislative intent. (See Comment 3.)
3. Protecting subcontractors and materials suppliers and their
ability to assert claims for payment
This bill would shorten the time within which a subcontractor or
materials supplier may assert a claim against the public works
surety bond. This bill is similar to other attempts by the
sponsor to shorten or eliminate the time period within which a
subcontractor could file a bond claim. (See AB 901 (Goldsmith,
Ch. 225, Stats. 1995); AB 2806 (Wyland, 2004); AB 411 (Yee,
2005); SB 738 (Calderon, 2007); AB 396 (Fuentes, 2009).)
Opponents argue that shortening the time within which to file a
bond claim has a substantially negative effect on the ability of
subcontractors to be paid. American Subcontractors Association
of California, Inc. (ASAC), an opponent of this bill, argues as
follows:
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 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 [an] 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 contractors 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 subcontractors,
particularly early finishing 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.
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ASAC submits that general contractors [GCs] 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.
(Emphasis omitted.)
Existing law functions to provide subcontractors and materials
suppliers with a backup plan to receive payment for services and
materials rendered in the event the subcontractor who hired them
fails to pay. The 20-day preliminary notice functions
separately from the bond claim notice. The 20-day preliminary
notice puts the general contractor on notice that a "tier 1"
subcontractor hired a "tier 2" subcontractor which may not have
been paid for services or materials rendered. The surety bond
claim submitted by the subcontractor or materials supplier
functions as a notice to the surety that an outstanding claim
exists. It is important to note that a subcontractor or
materials supplier on a public works projects is restricted to
submitting bond claims for payment recovery, as opposed to
filing a mechanic's lien as authorized in private works
projects. (See Civ. Code Sec. 3109.) Therefore, a
subcontractor or materials supplier may only claim against the
project's bond in order to receive payment for money owed.
Under existing law, if the 20-day preliminary notice is not
received by the general contractor, a surety claim may still be
filed by the subcontractor within 15 days after recordation of
project completion or within 75 days of project completion. It
should be noted that there are a variety of reasons for which a
20-day preliminary notice was not received by the contractor.
Opponents of this bill are aware of many instances in which the
subcontractor mailed the 20-day preliminary notice to the wrong
address. In this event, if the 20-day preliminary notice was
submitted a second time to the correct address, but mailed
outside the 20-day limit, the subcontractor or materials
supplier would have to submit a bond claim in order to perfect
any claim to the bond.
Under this bill, the surety claim must be submitted prior to the
completion of the project or prior to the recordation of the
notice of project completion. Although the sponsors tentatively
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agreed to amend the bill to provide that the project owner must
give notice of pending completion of the project to all
subcontractors and materials suppliers who had submitted a
20-day notice bond claim, the provisions of this bill still
would contain loopholes whereby the ability of subcontractors
and materials suppliers to file surety claims for payment of
services and materials rendered may be entirely cut off.
a. Loophole Scenario 1: Provisions of this bill contain no
deadline for contractors to submit Notice of Pending
Completion to subcontractors
This bill provides that a contractor must submit a notice of
pending completion to all subcontractors who have submitted a
20-day preliminary notice. This bill provides that
subcontractors are allowed to submit a bond claim prior to
project completion or prior to recording the notice of
completion.
As noted by the opponents of this bill, in some instances, the
notice of completion of the project is never recorded. This
bill, which specifies no deadline prior to the completion of
the project by which the contractor must send notice of
pending completion to the subcontractors, would allow a
general contractor to send out the notice of pending
completion to subcontractors the day of project completion.
If the notice of completion subsequently is never recorded,
the subcontractors who failed to submit a 20-day preliminary
notice would have had to submit their bond claims on the day
of completion. As the sponsor argues, submitting the 20-day
preliminary notice perfects the bond claim. It is only
subcontractors who did not submit the 20-day preliminary
notice that would need to file a bond claim. These
subcontractors would not be given notice pending projection
completion by the contractor because the contractor is unaware
of the existence of these contractors. Given that most
subcontractors do not continually monitor job sites to see
when the project has been completed, subcontractors unaware of
the projection completion date would be potentially cut off
from utilizing the bond claim provision that was specifically
crafted into existing law and agreed upon by the sponsors when
the existing statute was enacted when the notice of project
completion is never recorded.
b. Loophole Scenario 2: A subcontractor hired after the
Notice of Pending Completion is sent by the contractor
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Another example of a scenario in which a subcontractor may be
unfairly prejudiced by the provisions under this bill is when
a subcontractor is hired on the last day of the project.
Under existing law, the subcontractor is required to file a
preliminary notice within 20 days of rendering labor or
materials. If the subcontractor was hired on January 1, 2010,
the same day as the day of completion, the subcontractor would
have until January 21, 2010 to submit the 20-day preliminary
notice and thereafter is able to file a claim against the
surety. On the other hand, if this subcontractor
inadvertently failed to submit the 20-day preliminary notice
on the same day it began and ended work, under existing law
the subcontractor could still enforce its claim against the
bond by giving written notice to the surety either within 15
days of the recordation of a notice of completion or, if no
notice of completion is recorded, within 75 days after
completion of the project.
Under this bill, if the project is completed on January 1,
2011, the subcontractor still has 20 days to submit a 20-day
preliminary notice. However, if the subcontractor fails to
submit the 20-day preliminary notice, the subcontractor must
submit the written claim against the bond prior to completion
of the project, which, in this case, would be on the same day
it renders labor or materials, or it must submit the bond
claim before the recordation of notice of project completion.
Given the tight time frame, it is arguable that the contractor
would not provide a notice of pending completion to the
subcontractor because the contractor would not know in advance
the existence of the subcontractor hired on the final day of
the project. The subcontractor would have to guess at when
the notice of completion would be recorded and submit the bond
claim before that date, which may be before the 20-day
preliminary notice deadline.
Although the late-hired subcontractor can still submit a
20-day preliminary notice after rendering services, he or she
may not be paid pursuant to this notice. This bill would cut
off the subcontractor's subsequent claim on the bond if the
subcontractor did not submit it prior to the recording of the
notice of completion of the project.
To address these issues, ASAC offered an amendment which would
have removed the bill's provision regarding claim deadlines
based on project completion or recording of the notice of
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completion. Instead, the proposed amendment would have reduced
the final deadline from 75 days, under existing law, to 47 days
from project completion to submit a bond claim. ASAC argues
that 47 days is the lowest number that could be applied because
the public entity typically has 30 days to make the final
payment to the general contractor, which in turn has ten days to
make a progress payment to the tier 1 subcontractor, which in
turn would have seven days, under this bill, to pay the tier 2
subcontractor. If a late-hired tier 2 subcontractor completed
work on the last day of the job, he or she would not get paid
for these services until at most 47 days after project
completion. If, on the 47th day, the tier 2 subcontractor
realized no payment was forthcoming, the tier 2 subcontractor
could immediately file a bond claim. Committee staff
recommended rounding this number to 50 days for convenience of
all parties and also to provide an additional three days to file
the bond claim.
Committee staff recommended an amendment which would have
provided, in the event a subcontractor or materials supplier did
not receive a 45-day notice of pending completion from the
project owner and the notice of completion is never recorded, a
subcontractor or materials supplier could submit a bond claim
within 50 days of project completion. AGCC agreed to provide a
45-day notice of pending completion, but believed that
subcontractors and materials suppliers should only be allowed 30
days from project completion to submit a bond claim. As
discussed above, 30 days is insufficient time for payments to
trickle down from the public entity to the subcontractor. By
the time the late-hired subcontractor or materials supplier
realizes, on the 47th day, that they have not been paid it is
too late for them to submit a bond claim to protect their claim
for payment.
ASAC also submitted an amendment to count the additional days
within which to file a bond claim from the date of completion or
payment of all progress payments, change orders, retentions, and
interest if any, by the general contractor to the subcontractor
to whom the claimant provided materials or services. Given that
the tier 2 subcontractor or materials supplier potentially would
have no way to know when all progress payments were made because
they are not in direct contact with the general contractor or
public entity, a more decisive date must be established from
which to begin counting the days within which to file a bond
claim. Committee staff recommended setting this decisive date
based on "completion," as defined under Section 3086 which
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provides that works of improvement which must be accepted by a
public entity are deemed completed on the date of acceptance.
Multiple attempts at compromise between the stakeholders failed.
The current language of this bill provides no safeguards for
unsophisticated and unprotected subcontractors and materials
suppliers as requested by this Committee when it heard AB 3357
(Goldsmith, Ch. 974, Stats. 1994), which created the current
75-day protection. AB 3357 provided that the 90-day preliminary
notice would be reduced to a 20-day preliminary notice, but
subcontractors and materials suppliers would also be able to
utilize the 75-day bond claim procedure. (See Comment 2.) AB
3357 was a compromise which benefited the contractors who wanted
preliminary notices to be submitted faster and provided the bond
claim safeguard to protect payment rights of the subcontractors
and materials suppliers.
4. Ability of contractors to effectively manage project expenses
This bill would require a subcontractor to submit before the
completion of the project or before the recordation of notice of
completion of the project its claim on the surety bond for
payment for services or material rendered. The sponsor argues
that, by requiring the subcontractor to give notice of a
potential claim, "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."
General contractors need to be aware of expenses of the project
in order to arrange for payment and revise their budgets
accordingly. Existing law requires subcontractors to file
20-day preliminary notices, which gives general contractors
information that these subcontractors are expecting payment.
However, existing law also provides a fall back provision
whereby, in the event the 20-day preliminary notice is not
received from the subcontractor, the subcontractor can still
submit a surety claim against the project bond.
This fall back provision has a negative effect on general
contractors. The sponsor argues that, without being given
notice of subcontractor claims through the 20-day preliminary
notice requirement, the general contractor would have paid the
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first or second tier contractor for services and materials
rendered. The general contractor then has no knowledge of
whether the first or second tier contractor actually paid the
third and fourth tier subcontractors that they hired. Further,
the sponsor argues that existing law allows subcontractors to
ignore the 20-day preliminary notice and general contractors are
made aware of subcontractor claims long after the general
contractors made payments to the first tier subcontractors. In
some instances, the first tier subcontractors have gone out of
business. The general contractors pay once to the first or
second tier, then have to pay out again, based on the subsequent
bond claims, to cover the payments still due to the third or
fourth tier contractors.
However, pursuant to Civil Code Section 3248(b), the general
contractor may require the subcontractor to carry a bond to
reimburse the general contractor for claims made by the second
and third tier subcontractors. The general contractors, while
claiming the burden of making first a payment to the first tier
subcontractor, then being hit by surprise by the second and
third tier subcontractor claims, have the ability to protect
themselves from this scenario through the first tier
subcontractor bond. Committee staff does not have any
information as to how many claims the general contractor pays to
"surprise" second and third tier subcontractors which are then
offset by the bond payouts from first tier contractors.
5. Reducing the time frame for payment to subcontractors
This bill would reduce the amount of time a contractor or
subcontractor, upon receiving a progress payment, has to pay a
subcontractor for labor or materials rendered on a private and
public works projects. This bill makes no change to the
provision whereby contracting parties may establish their own
payment deadlines. The revision proposed by this bill is
beneficial to parties receiving payments for services performed
in that they will be paid three days earlier than under existing
law.
6. Law Review Commission
The issues surrounding the ability of subcontractors and
materials suppliers to get paid for services and materials
rendered to contractors who need a better system to effectively
manage project monies are complex. Given the number of bills
submitted on these issues since 1994, the committee should
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consider whether it would be appropriate for the Law Revision
Commission to study and issue a report - such a report would
provide guidance for how best to clarify, or if supported by a
thorough study, how to modify the current process for submitting
preliminary notices and surety bond claims.
SHOULD THE LAW REVISION COMMISSION STUDY THE PUBLIC WORKS
PROJECTS PRELIMINARY NOTICE AND SURETY BOND PROCEDURES?
Support : Associated General Contractors of San Diego;
California Legislative Conference of the Plumbing, Heating and
Piping Industry; National Electrical Contractors Association
Opposition : American Subcontractors Association California,
Inc.; Construction Industry Legislative Council; Dynamic Precast
Co., Inc.; one individual
HISTORY
Source : Associated General Contractors of California;
Construction Employers Association; National Electric
Contractors Association
Related Pending Legislation : None Known
Prior Legislation : See Background; Comment 2; Comment 3.
Prior Vote :
Assembly Business, Professions and Consumer Protection Committee
(Ayes 11, Noes 0)
Assembly Judiciary Committee (Ayes 10, Noes 0)
Assembly Floor (Ayes 71, Noes 0)
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