BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 802|
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THIRD READING
Bill No: SB 802
Author: Leno (D)
Amended: As introduced
Vote: 21
SENATE GOVERNMENTAL ORG. COMMITTEE : 12-1, 4/14/09
AYES: Wright, Harman, Benoit, Calderon, Denham, Florez,
Negrete McLeod, Oropeza, Padilla, Wiggins, Wyland, Yee
NOES: Romero
SENATE APPROPRIATIONS COMMITTEE : 12-0, 4/27/09
AYES: Kehoe, Cox, Corbett, Denham, DeSaulnier, Hancock,
Leno, Oropeza, Walters, Wolk, Wyland, Yee
NO VOTE RECORDED: Runner
SUBJECT : Public contracts: retention proceeds
SOURCE : California Association of Sheet Metal and Air
Conditioning
Contractors National Association
California Legislative Conference of the
Plumbing, Heating
and Piping Industry
DIGEST : This bill requires 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 requires the Department of
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General Services to withhold not more than five percent of
the contract price until final completion and acceptance of
the project.
ANALYSIS : 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 the
Department of General Services (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.
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
five percent 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
percent of the percentage of actual work completed.
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 percent of the total amount payable by the terms of the
contract.
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
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been withheld within seven days of receipt from the public
agency of retention proceeds.
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.
This bill:
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 five percent of
the payment.
2.Stipulates that in no event shall the total retention
proceeds withheld exceed five percent of the contract
price.
3.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
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 percent 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
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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.Modifies an existing provision of law that requires the
DGS to withhold at least five percent of the contract
price until final completion and acceptance of the
project to instead require retention of not more than
five percent of the contract price until final completion
and acceptance of the project.
Comments
The author's office notes that this bill 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
five percent. In addition, the author's office references
SB 593 (Margett), Chapter 341, Statutes of 2008, eliminates
retention only for transportation projects.
The author's office points out that the sponsors of this
bill currently believe there is sufficient state precedent
for capping retention.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2009-10 2010-11
2011-12 Fund
Percent limits on Unknown,
likely minor, if any, new
General/
retention proceeds costs;
potential reduction in project
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Bond/
and withholdings costs
Special
SUPPORT : (Verified 4/28/09)
CA Assoc. of Sheet Metal & Air Conditioning Contractors'
National Assoc. (co-source)
CA Legislative Conference of the Plumbing, Heating and
Piping Industry (co-source)
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
Champion Industrial Contractors, Inc.
Control Air North, Inc.
Couts Heating & Cooling, Inc.
Custom Metal Fabricators, Inc.
Eberhard Roofing
Engineering Contractors' Association
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.
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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
OPPOSITION : (Verified 4/28/09)
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
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
ARGUMENTS IN SUPPORT : According to the California
Association of Sheet Metal & Air Conditioning Contractors'
National Association and the California Legislative
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Conference of the Plumbing, Heating and Piping Industry,
the sponsors of this bill, 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. The Sponsors claim
that this policy effectively harms local contractors and
ultimately serves to artificially inflate the cost of
infrastructure to the taxpayer.
Specifically, the Sponsors reference existing law that
requires the withholding from contractors of not less than
five percent of total payment for time and materials. The
Sponsors state that often times this retention amount can
be as much as 10 percent or more.
The Sponsors note that the typical profit margin in the
construction industry for public works projects is three
percent. 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.
The Sponsors argue that the current "payment retention"
policy constitutes an unfair and unreasonable requirement
for licensed, responsible and bonded California
contractors. The 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.
Finally the Sponsors state that this bill will move
California policies closer to those already employed by the
federal government when it comes to retention and public
works. The Sponsors note that the federal government
understands that a performance bond protects the fiduciary
responsibilities of government. And, they will pay 100
percent 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
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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."
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 five percent and removing the flexibility to
negotiate a good faith provision between a public agency
and a contractor, this bill will significantly raise the
financial risks associated with construction projects and
threaten an agency's ability to manage construction
projects.
TSM:do 4/27/09 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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