BILL ANALYSIS
------------------------------------------------------------
|SENATE RULES COMMITTEE | AB 2216|
|Office of Senate Floor Analyses | |
|1020 N Street, Suite 524 | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
------------------------------------------------------------
THIRD READING
Bill No: AB 2216
Author: Fuentes (D)
Amended: 8/20/10 in Senate
Vote: 21
SENATE JUDICIARY COMMITTEE : 3-1, 6/29/10
AYES: Corbett, Hancock, Leno
NOES: Harman
NO VOTE RECORDED: Walters
SENATE APPROPRIATIONS COMMITTEE : 7-0, 8/2/10
AYES: Kehoe, Alquist, Ashburn, Corbett, Price, Wolk, Yee
NO VOTE RECORDED: Emmerson, Leno, Walters, Wyland
ASSEMBLY FLOOR : 71-0, 5/20/10 - See last page for vote
SUBJECT : Works of improvement: progress payments:
notice:
retention proceeds
SOURCE : Associated General Contractors of California
Construction Employers Association
National Electric Contractors Association
DIGEST : This bill (1) requires 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
CONTINUED
AB 2216
Page
2
subcontractors; (2) requires, 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; (3) prohibits 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section would be repealed as of January 1, 2105; and (4)
prohibits 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 to
withhold not more than five 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.
Senate Floor Amendments of 8/20/10 (1) clarify that
laborers are exempt from the requirement to give a 20-day
public works preliminary bond notice in order to enforce a
claim on any payment bond given in connection with a public
work, (2) allow specified public entities to withhold a
retention amount in excess of five percent on complex
public works projects, and (3) to provide that when the
retention amount on a complex public works project is
higher than five percent, then progress payments shall not
exceed 95 percent of the actual work completed until final
completion and acceptance of the project.
ANALYSIS : Existing law requires that, for private and
public works of improvement, and in a public works
contract, a prime contractor or subcontractor 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.
This bill, instead, requires that those amounts be paid not
later than seven days after receipt of each progress
payment.
CONTINUED
AB 2216
Page
3
Existing law requires, with regard to a contract entered
into on or after January 1, 1995, in order to enforce a
claim upon any payment bond given in connection with a
public work, that a claimant give the 20-day public works
bond preliminary notice, as provided. Existing law further
authorizes a claimant, if the 20-day public works
preliminary bond notice was not given as prescribed by
statute, to enforce a claim by giving written notice to the
surety and the bond principal, as provided, within 15 days
after recordation of a notice of completion, or if no
notice of completion has been recorded, within 75 days
after completion of the work of improvement.
This bill, instead, with regard to a contract entered into
on or after January 1, 2011, requires that the written
notice to be given to the surety and the bond principal be
given prior to the completion, as defined, of the project,
or recordation of a notice of completion. This provision
does not apply to a laborer, or any other person exempt
from the requirement of giving a preliminary notice as
required in Section 3098 of the Business and Professions
Code.
Existing law authorizes the Department of General Services
(DGS), or any other department with authority to enter into
contracts, to contract with suppliers for goods and
services and for public works. Existing law provides that
in a contract relating to the construction of a public work
of improvement between the public entity and original
contractor, the original contractor and a subcontractor,
and in a contract between a subcontractor and any
subcontractor thereunder, the percentage of retention
proceeds withheld cannot exceed the percentage specified in
the contract between the public entity and the original
contractor.
This bill, instead, until January 1, 2015, prohibits
retention proceeds from exceeding five percent of the
payment, as specified, 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 thereunder.
CONTINUED
AB 2216
Page
4
Existing law contains various provisions relating to
contracts for the performance of public works of
improvement, including provisions for the payment of
progress payments and the disbursing and withholding of
retention proceeds. Existing law prohibits progress
payments upon these contracts from being made in excess of
95 percent of the percentage of actual work completed plus
a like percentage of the value of material delivered, as
specified, and requires DGS to withhold not less than five
percent of the contract price until final completion and
acceptance of the project.
This bill, instead, prohibits progress payments upon these
contracts from being made in excess of 100 percent of the
percentage of actual work completed, and requires DGS to
withhold not more than five percent of the contract price
until final completion and acceptance of the project, as
specified.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
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
costs Bond/
and progress payments
Special
SUPPORT : (Verified 8/27/10)
Associated General Contractors of California (co-source)
Construction Employers Association (co-source)
National Electric Contractors Association (co-source)
Associated General Contractors of San Diego
California Legislative Conference of the Plumbing, Heating
CONTINUED
AB 2216
Page
5
and Piping Industry
National Electrical Contractors Association
OPPOSITION : (Verified 8/27/10)
Association of California Healthcare Districts
Association of California Water Agencies
California Association of Joint Powers Authorities
California Association of Sanitation Agencies
California Association of School Business Officials
California School Boards Association
California Special Districts Association
California State Association of Counties
Coalition for Adequate School Housing
League of California Cities
Regional Council of Rural Counties
Riverside County of Superintendent of Schools
Urban Counties Caucus
ARGUMENTS IN SUPPORT : 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'
CONTINUED
AB 2216
Page
6
claims from second and third tier contractors at a time
when all of the funds have already been paid to higher
tier subcontractors."
ARGUMENTS IN OPPOSITION : The California Special
Districts Association writes:
"Over the last 15 years, legislation to limit retentions
on public projects to 5% has been vetoed no less than 4
times by 3 Governors, including Governor Schwarzenegger,
Governor Davis, and Governor Wilson:
'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.'
-Governor Arnold Schwarzenegger, 2009 veto message of
SB 802 (Leno)
'It would be irresponsible to remove public agencies'
flexibility to
establish a reasonable retention limit on public works
projects.'
-Governor Pete Wilson, 1997 veto message of AB 940
(Miller)
'The private sector is free to establish its own level
for retention in an open marketplace, where building
owners, contractors and subcontractors freely enter
into construction contracts, which often include a 10
percent retention level. Here before me is a bill
which would arbitrarily restrict public agencies to
retention rates of half the private sector standard.'
-Governor Pete Wilson, 1997 veto message of AB 940
(Miller)
"As you are aware, amendments taken to AB 2216 on July 15
prohibit public agencies from withholding retention
proceeds above 5% from a contractor, regardless of the
contractor's performance of duties. We appreciate the
intent of the amendments taken on August 20 which provide
that retentions may exceed 5% if the project is
CONTINUED
AB 2216
Page
7
determined to be 'substantially complex' and include a
sunset of the provisions on January 1, 2015.
Unfortunately, these amendments do not address the
primary concerns with this legislation, and would
actually inflict increased costs upon taxpayers and
ratepayers:
August 20 amendments will raise project costs,
change-order costs, and insurance costs. By
acknowledging up-front that a job is 'substantially
complex, a public agency will publicly certify an
elevated degree of difficulty to bidders, who will
then be able to charge a new 'substantially complex'
premium. This will also impact the relationship
between the agency and contractor during the project
with regard to change orders and other issues as the
substantially complex designation could be used
against the public agency. As a further consequence,
the costs of bonds and insurance coverage on these
projects would likely face increased costs merely due
to the designation.
Amendments are based on the false premise that
retention rates are based on the complexity of
projects. In fact, retention rates are based on the
risk of a contractor failing to complete a project,
which is not necessarily tied to complexity. As
Governor Arnold Schwarzenegger noted in his veto
message of last year's Senate Bill 802 (Leno), 'public
works contracts have a higher level or risk as public
entities usually have to accept the low bidder.' AB
2216, as amended, does nothing to address this
critical concern.
"Local entities use contract retention proceeds to ensure
timely and on-budget performance from their contractors.
Retention rates are typically lowered in accordance with
good-faith performance of duties. AB 2216 would greatly
diminish this tool for local governments though there has
been no evidence to show that it has been misused. In
fact, many contractors establish escrow accounts that
allow retention proceeds to gain interest payments for
the contractor, thus reducing their costs and ensuring
completion of the project."
CONTINUED
AB 2216
Page
8
ASSEMBLY FLOOR :
AYES: Adams, Ammiano, Anderson, Arambula, Bass, Beall,
Bill Berryhill, Tom Berryhill, Blakeslee, Block,
Blumenfield, Bradford, Brownley, Buchanan, Caballero,
Charles Calderon, Carter, Chesbro, Conway, Cook, Coto,
Davis, De Leon, DeVore, Emmerson, Eng, Feuer, Fong,
Fuentes, Fuller, Furutani, Gaines, Galgiani, Garrick,
Gilmore, Hagman, Hall, Hayashi, Hernandez, Hill, Huber,
Huffman, Jeffries, Jones, Knight, Lieu, Logue, Bonnie
Lowenthal, Ma, Mendoza, Miller, Monning, Nestande,
Niello, Nielsen, V. Manuel Perez, Portantino, Ruskin,
Salas, Saldana, Silva, Skinner, Smyth, Solorio, Audra
Strickland, Swanson, Torlakson, Torres, Torrico, Tran,
Yamada
NO VOTE RECORDED: De La Torre, Evans, Fletcher, Harkey,
Nava, Norby, Villines, John A. Perez, Vacancy
RJG:mw 8/27/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
**** END ****
CONTINUED