BILL ANALYSIS
Bill No: SB
802
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Roderick D. Wright, Chair
2009-2010 Regular Session
Staff Analysis
SB 802 Author: Leno
As Introduced: February 27, 2009
Hearing Date: April 14, 2009
Consultant: Art Terzakis
SUBJECT
Public Contracts: retention proceeds
DESCRIPTION
SB 802 adds the following provisions to the Public Contract
Code pertaining to public contracts and retention proceeds
and makes a substantive change to an existing provision of
law pertaining to the same issue:
1. Provides that retention proceeds withheld from any
payment by a "public entity" from the original
contractor, by the original contractor from any
subcontractor, and by a subcontractor from any
subcontractor thereunder shall not exceed 5% of the
payment.
2. Also, stipulates that in no event shall the total
retention proceeds withheld exceed 5% of the contract
price.
3. In addition, provides that in a contract between the
original contractor and a subcontractor, and in a
contract between a subcontractor and any subcontractor
thereunder, the percentage of the retention proceeds
withheld shall not exceed the percentage specified in the
contract between the public entity and the original
contractor.
4. Provides that these provisions shall apply to all
SB 802 (Leno) continued
Page 2
contracts entered into on or after January 1, 2010.
5. Makes it explicit that under no circumstances shall any
of these provisions be construed to limit a public
entity's ability to withhold 150% of the value of any
disputed amount of work from the final payment or in the
event of a good faith dispute, nothing shall be construed
to require a public entity to pay for work that is not
approved or accepted in accordance with the proper plans
or specifications.
6. Defines "public entity" to mean every state agency,
office, department, division, bureau, board, or
commission, the California State University, the
University of California, a city, county, city and
county, chartered cities and counties, district, special
district, public authority, political subdivision, public
corporation, or nonprofit transit corporation wholly
owned by a public agency.
7. In addition, modifies an existing provision of law that
requires the Department of General Services (DGS) to
withhold at least 5% of the contract price until final
completion and acceptance of the project to instead
require retention of not more than 5% of the contract
price until final completion and acceptance of the
project.
EXISTING LAW
Existing law (the State Contract Act) governs contracting
between state agencies and private contractors and sets
forth requirements for the procurement of supplies,
materials, equipment, and services by state agencies.
Existing law sets out the various responsibilities of DGS
and other state agencies in overseeing and implementing
state contracting procedures and policies.
Existing law provides that in a contract between 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. (Public Contract Code
7200)
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Existing law requires payments on contracts with progress
payments to be made as the awarding department prescribes
and provides that a public agency shall withhold at least
5% of the contract price until final completion and
acceptance of the project, and that progress payments upon
public contracts shall not be made in excess of 95% of the
percentage of actual work completed. (Public Contract Code
10261)
Existing law requires a contractor in a public works
contract to file a payment bond with the public entity in
specified amounts depending on the value of the contract.
Existing law requires every original contractor who is
awarded a contract by a state entity involving expenditure
in excess of $5000 for any public work to file a
performance with the state entity in a sum not less than
100% of the total amount payable by the terms of the
contract. (Public Contract Code 7103)
Existing law governs the distribution of retention proceeds
in a public works contract and requires an original
contractor to pay subcontractors from whom retention has
been withheld within 7 days of receipt from the public
agency of retention proceeds. (Public Contract Code 7107)
Existing law prohibits Caltrans from withholding retention
proceeds when making progress payments for work performed
by a contractor. These provisions sunset on January 1,
2014.
BACKGROUND
Rerun of SB 619 (Migden) of 2008: The author's office
notes that this measure is a reintroduction of last
session's SB 619 (Migden) which was held by the author on
the senate floor to ensure that the sponsors had sufficient
time to discuss the benefits of this policy with the
Administration. Sponsors believe they have demonstrated
over the interim that it makes sense to cap the amount of
retention on public works contracts at 5%. In addition,
the author's office references SB 593 (Margett), signed
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into law last session, which eliminates retention only for
transportation projects. The author's office points out
that the sponsors of SB 802 currently believe there is
sufficient state precedent for capping retention.
Purpose of SB 802: The sponsors of this measure indicate
that current state policy relative to payment procedures
on public works diminishes the likelihood of California
small businesses from being able to fully participate in
the infrastructure and public works development approved
by voters in 2006. Sponsors claim that this policy
effectively harms local contractors and ultimately serves
to artificially inflate the cost of infrastructure to the
taxpayer.
Specifically, sponsors reference existing law that requires
the withholding from contractors of not less than 5% of
total payment for time and materials. Sponsors state that
often times this retention amount can be as much as 10% or
more.
Sponsors note that the typical profit margin in the
construction industry for public works projects is 3%. In
some cases, contractors must wait for years before being
fully paid for their work. In addition, California small
businesses, in many cases, have to pay a premium for
capital loans to make payroll and pay for materials if they
want to bid on public works projects. Sponsors argue that
the current "payment retention" policy constitutes an
unfair and unreasonable requirement for licensed,
responsible and bonded California contractors. Sponsors
emphasize that the total cost to taxpayers for public works
improvement projects increases as a result of (1) the loss
of bids from qualified local small businesses and (2) the
bid inflation that occurs due to the fact that the cost of
these capital loans is ultimately built into the cost of
the project. Thus, bond revenue intended for "bricks and
mortar" infrastructure is being used instead to pay
interest to banks.
Furthermore, sponsors state that this measure will move
California policies closer to those already employed by the
federal government when it comes to retention and public
works. Sponsors note that the federal government
understands that a performance bond protects the fiduciary
responsibilities of government. And, they will pay one
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hundred percent (100%) of the amount owed for work
completed and accepted because they know they can withhold
the necessary amounts for any work in dispute from the
appropriate progress payment. The Federal Acquisition
Regulation states, "Retainage should not be used as a
substitute for good contract management, and the
contracting officers should not withhold funds without
cause."
Example of Problem: The sponsors offer the following "real
world" example of the problems confronted by contractors:
A California sheet metal and air conditioning
contractor bids on a $4.5 million public works project to
install heating, ventilation and air conditioning (HVAC)
systems in several new buildings on a UC campus. Due to
the competitiveness of this public works project, the
calculated profit margin is squeezed to 3%. The
contractor's bid is accepted by the University's general
contractor (GC) and work begins. The contractor finishes
the job on-time and with total satisfaction. University
administrative staff and students occupy the buildings in
September of 2005. The contractor is now due the final 10%
of payment or $450,000.
In satisfactorily completing the job, the contractor has
received $4,050,000 from the University and GC. At the
same time, the contractor has paid out $4,365,000 in labor
and materials to build the project for UC. The current
retention policies for public works have caused the small
business contractor to spend $315,000 of his company's
money to complete the job due to the fact that the UC and
GC have withheld payment of $450,000 to this contractor.
Meanwhile the GC and the University begin arguing over the
pigment color of concrete on the side of a building
installed by the concrete contractor. The University
refuses to release from the retention escrow account the
payment to the other contractors including the HVAC
contractor until they have the right pigment color from the
GC.
The contractor is now paying premium interest on the
$315,000 loan while waiting for the University to make
final payment. Twenty months later, the HVAC contractor
still has not been paid. The contractor has now spent an
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additional $34,125 to the bank in interest including an
additional $15,000 to attorneys and staff in repeated
attempts to secure the final payment from the University.
The contractor has now spent $4,414,125 on this job and is
out of pocket $364,125 with no end in sight.
The sponsors emphasize that the above-mentioned "real
scenario" places tremendous financial pressure on the
contractor's credit line and reduces the contractor's
future operating capital which is necessary to continue
bidding on other public or private jobs. In addition, the
small business contractor decides to never bid again on a
public works job; or, if the contractor does decide to bid
on a future public works job, the contractor will very
likely inflate the price of his/her bid to account for the
anticipated cost of interest on his/her own capital and
thereby, artificially inflate the cost of public works.
Arguments in Opposition: Opponents point out that
retention is necessary for public agencies to ensure: (1)
prompt completion of a project; (2) that contractors return
to a project to complete all contract requirements,
including small unprofitable punch-list items; (3) there
are sufficient funds for public agencies to correct
defective work if a contractor fails to do so; and, (4)
sufficient funds are on hand in order to pay workers in the
event contractors have failed to properly pay prevailing
wage as required by state law.
Opponents claim that by prohibiting contract withholdings
from exceeding 5%, and removing the flexibility to
negotiate a good faith provision between a public agency
and a contractor, SB 802 would significantly raise the
financial risks associated with construction projects and
threaten an agency's ability to manage construction
projects.
PRIOR/RELATED LEGISLATION
SB 629 (Liu) 2009-10 Session. Would cap the amount of
retention on "private" works of improvement at 5%.
(Pending in Senate Judiciary Committee)
AB 396 (Fuentes) 2009-10 Session. Among other things,
would require DGS to withhold no more than 5% of the
contract price until final completion and acceptance of the
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project. Also, would require that retention proceeds not
exceed 5% of the payment, as specified, for all contracts
entered into on or after January 1, 2010, between a public
entity, as defined, and an original contractor, between an
original contractor and a subcontractor, and between all
subcontractors thereunder. (Pending in Assembly policy
committee)
SB 619 (Migden) 2007-08 Session. Similar to SB 802 (Leno)
of 2009. (Placed on Senate Inactive File at request of
author)
SB 593 (Margett) Chapter 341, Statutes of 2008. Prohibited
Caltrans from withholding retention proceeds when making
progress payments for work performed by a contractor.
Also, provided for the repeal of these provisions on
January 1, 2014.
AB 806 (Keeley) 1999-2000 Session. Similar to SB 802
(Leno) of 2009. (Vetoed)
SUPPORT: As of April 10, 2009:
CA Assoc. of Sheet Metal & Air Conditioning Contractors'
National Assoc. (sponsor)
CA Legislative Conference of the Plumbing, Heating and
Piping Industry (co-sponsor)
A.O. Reed & Co.
Air Conditioning & Refrigeration Contractors Association
Air Conditioning Sheet Metal Association
American Subcontractors Association California, Inc.
Atlas Heating and Air Conditioning
Bal-aire Mechanical, Inc.
Bel Air Mechanical, Inc.
Bell Products, Inc.
Blocka Construction, Inc.
Building Industry Credit Association
California Chapter of the American Fence Contractors'
Association
California Chapters of the National Electrical Contractors
Association
California Fence Contractors' Association
California Landscape Contractors Association
California State Association of Electrical Workers
California State Pipe Trades Council
Capital Sheet Metal
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Champion Industrial Contractors, Inc.
Control Air North, Inc.
Couts Heating & Cooling, Inc.
Custom Metal Fabricators, Inc.
Eberhard Roofing
Engineering Contractors' Association
SUPPORT (continued)
Engineering & Utility Contractors Association
Environmental Systems Inc.
Flasher/Barricade Association
Foothill Air Conditioning and Heating, Inc. Golden State
Builders Exchanges
Hawaiian Air Corp.
Heating & Air Conditioning, Inc.
Indoor Environmental Services
Karcher Firestopping Inc.
Key Air Conditioning Contractors, Inc.
Lefco, Inc.
Marin Builders' Association
Michael D. Burns Company, Inc.
Peterson Mechanical Inc.
Roofing Contractors Association of California
Sheet Metal & Air Conditioning Contractors National Assoc.
(San Diego)
Smith Heating & Air Conditioning, Inc.
State Building and Construction Trades Council
Union Roofing Contractors Association
Western Air Limbach
Western States Council of Sheet Metal Workers
Xcel Mechanical Systems
OPPOSE: As of April 10, 2009:
Alameda County Flood Control and Water Conservation
District Zone 7
Arden Manor Recreation and Park District
California Association of Sanitation Agencies
California Association of School Business Officials
California's Coalition for Adequate School Housing
California Special Districts Association
California State Association of Counties
East Niles Community Services District
Hayward Area Recreation and Park District
Heber Public Utility District
Kern County Water Agency
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League of California Cities
Mammoth Community Water District
Pleasant Hill Recreation & Park District
Port San Luis Harbor District
San Mateo County Harbor District
South Tahoe Public Utility District
Squaw Valley Public Service District
Stockton East Water District
Three Valleys Municipal Water District
United Water Conservation District
Ventura Port District
FISCAL COMMITTEE: Senate Appropriations Committee
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