BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
802 (Leno)
Hearing Date: 4/27/2009 Amended: As Introduced
Consultant: Bob Franzoia Policy Vote: G O 12-1
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BILL SUMMARY: SB 802 would require that contract retention
proceeds not exceed five percent of the payment of all contracts
entered into after January 1, 2010 between a public entity and
an original contractor, between an original contractor and a
subcontractor, and between all subcontractors. This bill would
require the Department of General Services (DGS) to withhold not
more than five percent of the contract price until final
completion and acceptance of the project.
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Fiscal Impact (in thousands)
Major Provisions 2009-10 2010-11 2011-12 Fund
Percent limits on Unknown, likely minor, if any, new
costs;General/
retention proceeds potential reduction in project costsBond/
and withholdings 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. Additionally, the monetary
impact of a contract dispute is generally not related to the
amounts that can be withheld or retained by the state. A
reduction in the retention level should increase the number of
contractor bidding on a project.
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
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SB 802 (Leno)
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 619 (Migden) 2007, which passed
Senate Appropriations Committee 15-0. SB 619 passed the
Assembly but was held and not sent to the Governor.