BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
2216 (Fuentes)
Hearing Date: 8/2/2010 Amended: 7/15/2010
Consultant: Bob Franzoia Policy Vote: Judiciary 3-1
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BILL SUMMARY: AB 2216 would do the following:
- Require that for private and public works of improvement, a
prime contractor or subcontractor pay to any subcontractor, not
later than seven days (currently ten days) after receipt of each
progress payment, the respective amount allowed the contractor
on account of the work performed by the subcontractors.
- Require, with regard to a contract entered into on or after
January 1, 2011, that written notice given to the surety and the
bond principal be given prior to the completion of the project,
or recordation of a notice of completion, as specified.
- Prohibit retention proceeds from exceeding five percent of the
payment for those contracts entered into on or after January 1,
2011, between a public entity, as defined, and an original
contractor, between an original contractor and a subcontractor,
and between all subcontractors. This section would be repealed
as of January 1, 2105.
- Prohibit progress payments upon public works contracts from
being made in excess of 100 percent (currently 95 percent) of
the percentage of actual work completed, and would require the
Department of General Services (DGS) to withhold not more than 5
percent (currently not less) of the contract price until final
completion and acceptance of the project. This section would
return to current law after January 1, 2015.
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Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12 2012-13 Fund
Change in limits on Unknown, likely minor, if any, new
costs;General/
retention proceeds potential reduction in project costsBond/
and progress payments Special
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STAFF COMMENTS: Retention proceeds represent a percentage of the
amount of a contract that is withheld by the public entity or
the original contractor. By withholding a percentage of a
contract, the public entity or the original contractor maintains
a degree of financial control over a project. In general, the
public entity or the original contractor withholds at least five
percent of payment until the contract is completed to the
satisfaction of the public entity or original contractor. (When
a project is within five percent of completion, the public
entity or original contractor may reduce the five percent to a
minimum of 125 percent of the value of the remaining work.)
Reducing the percentage of a contract that can be withheld would
not result in new project costs though it may increase the
likelihood that a contractor or subcontractor would fail to
complete contracted work, thereby leading to delays and added
costs.
The monetary impact of a contract dispute is generally not
related to the amounts that can be withheld or retained by the
state. DGS notes the use of a retention amount greater than
five percent is used generally only on smaller projects. A
reduction in the retention level should increase the number of
contractor bidding on a project.
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AB 2216 (Fuentes)
The federal government has implemented a zero percent
withholding policy and requires any project which receives
federal funds do the same. As a result of the federal policy
Caltrans, which contracts projects involving federal funds, has
practical experience with more restrictive contract retention
requirements. At this time, staff is unaware of any increase in
contract costs to Caltrans as a result of having to manage
contacts with zero or limited retention. Though the provisions
of the bill do not apply to the University of California (UC),
it is useful to note that since July 2006 the UC has adopted a
policy of limiting retention to five percent. Previously, UC
retained ten percent of payments.
Under current law, a contractor on a public works project is
required to file a performance bond in specified amounts
depending on the value of the contract. By restricting the size
of retention proceeds, the bill would increase the likelihood
that a contractor will receive a greater percentage of the
contract payments upon completion
of a project. By doing so, however, the bill would place
greater pressure on the performance bond to make the public
entity or the original contractor financially whole in
the event of a contract dispute.
Local projects generally are administered such that, at any time
after 50 percent of a project is complete and there is a finding
that satisfactory progress is being made, the local government
may reduce or eliminate further withholding. Local governments,
which appear to make greater use of retention amounts in excess
of five percent, may experience greater difficulty in ensuring
their public works contracts are fully executed.
This bill is similar to SB 802 (Leno) 2009 which was vetoed with
the following message:
Under current law, public entities, at a minimum, must retain
five percent of a payment to a contractor completing a public
works project. This bill would restrict the state's ability to
retain more than five percent of payment and no more than five
percent of the public work contract price.
When a contractor fails to complete a public works project, the
public entity needs recourse to ensure that the project gets
completed. Public works contracts have a higher level of risk
as public entities usually have to accept the low bidder.
Though there are options available to the state to go after a
contractor who fails to complete the terms of a public works
contract, retaining portions of payment to the contractor
provides incentive for the contractor to complete the project.
While I am sympathetic with the concerns of subcontractors, the
state's responsibility is to protect the taxpayer to make
certain that public works projects are completed correctly and
within budget; limiting the retention amount hampers the state's
ability to do that.