BILL ANALYSIS
SB 802
Page 1
Date of Hearing: August 19, 2009
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Kevin De Leon, Chair
SB 802 (Leno) - As Introduced: February 27, 2009
Policy Committee: Business and
Professions Vote: 11-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill limits the allowable retention proceeds on public
works contracts. Specifically, this bill:
1)Limits the amount of retention proceeds that may be withheld
from any progress payment, on any state or local government
public works contract entered into after January 1, 2010, to
5% of the progress payment. This limitation would apply to
retention payments by any public entity to a general
contractor, by the general contractor to its subcontractors,
and to any subcontractors thereunder.
2)Stipulates that the percentage of retention proceeds withheld
in a contract between a general contractor and a subcontractor
and in a contract between a subcontractor and another
subcontractor shall not exceed the percentage retained by the
public entity in its contract with the general contractor.
3)States that the limitation in (2) does not apply if the
contractor notifies the subcontractor that a performance or
payment bond may be required and the subcontractor refuses to
furnish the bond.
FISCAL EFFECT
In general, reducing the amount of retention that can be
withheld would to some extent increase the likelihood that a
contractor or subcontractor would fail to fully perform their
work, and thus could lead to higher costs to the contracting
entity related to the administrative burden, project delays, and
SB 802
Page 2
potential litigation associated with finding alternative means
to complete the work.
1)The fiscal impact to the state would probably be minor.
According to the Department of General Services, the use of a
retention amount exceeding 5% is an exception on state
projects, and is used generally only on smaller projects.
The University of California has a 5% retention practice.
Caltrans contracts funded at least in part with federal monies
(85% of all Caltrans capital outlay) have no retention
provisions, as required by federal law.
2)The fiscal impact on local governments could be more
significant as they are generally more likely to use a
retention amount exceeding 5%, and thus would be restricted by
this bill. Any additional costs associated with this
limitation would not be reimbursable, however.
COMMENTS
1)Background . Retention proceeds represent a percentage of the
amount of a contract that is withheld from a progress payment
by the public entity to the general contractor, or the general
contractor from one its subcontractors. The withholding of
these amounts allows the public entity or general contractor
to maintain a degree of financial control over a project.
Current law requires the state and public agencies to withhold
at least 5% of the contract price until final completion and
acceptance of the project, except as follows:
a) For state projects, after 95% of the work has been
completed, the total funds withheld may be reduced to an
amount of at least 125% of the value of the work yet to be
completed.
b) For local agency projects, at any time after 50% of a
project is complete and the legislative body finds that
satisfactory progress is being made, it may reduce or
eliminate further withholding.
2)Purpose . The author believes that the state's retention policy
SB 802
Page 3
diminishes the likelihood of small businesses participating in
public works projects. The author states that the typical
profit margin for the construction industry on such projects
is only about 3% or 4%. This means that, if 10% of project
payments are being retained by the government entity,
contractors must finance up to 7% of the total project on
their own. According to the author, "This is a classic
pay-to-play scenario in which large contractors benefit and
small contractors with fewer resources bear an undue burden.
They must either cover the costs of labor themselves or take
out lines of credit while they wait for payments on work
completed to be released. In some cases, contractors pay the
interest on loans for years before being fully paid for their
work."
"As a result of the current retention policy, any contractor
who bids on a public works job must anticipate the financing
of a substantial portion of the total value of the contract
for an undefined period of time. For example, if a contract
is worth $5 million, a small business contractor will have to
anticipate taking out a loan of up to $350,000 to cover their
payroll and material expenses in building the project. Many
qualified small businesses simply cannot afford to tie up
their own capital or operate on costly loans for an indefinite
period of time. This limits the pool of available and willing
contractors and keeps otherwise fully qualified and capable
contractors from participating."
The bill is supported by numerous contractor associations and
individual contractors. The author's office indicates that 17
other states currently limit retention to 5%.
3)Prior Legislation . In 2008, an identical bill (SB 619, Migden)
passed the Assembly but was held and not sent to the governor.
Several bills with similar retention limitations have been
vetoed: AB 806 (Keeley) of 1999; AB 940 (Miller) of 1997; and
AB 1949 (Conroy) of 1996. In his veto of AB 806, Governor
Davis stated, "The state has a fiduciary responsibility to the
California taxpayers to use their money wisely which includes
not incurring unnecessary risks?While the private sector can
choose contractors with whom they have experience and are
familiar with their reliability and the quality of work,
public entities must accept the low bidder. Because of this
requirement, public entities inherently face a higher level of
risk when contracting for construction projects.
SB 802
Page 4
"While the concerns of the construction industry are real, the
state has a higher responsibility to the taxpayer ensuring
that publicly-funded projects are completed on budget and on
time. It would be irresponsible to remove public agencies'
flexibility to establish a reasonable retention limit on
public works projects."
4)Opposition . The California Association of Counties, the
League of California Cities, the California Special Districts
Association, the Association of California School
Administrators, and several individual school districts argue
against removing the authority of local agencies to decide the
appropriate retention amount.
Analysis Prepared by : Chuck Nicol / APPR. / (916) 319-2081