BILL ANALYSIS
SB 802
Page 1
SENATE THIRD READING
SB 802 (Leno)
As Introduced February 27, 2009
Majority vote
SENATE VOTE :35-0
BUSINESS & PROFESSIONS 11-0 APPROPRIATIONS 17-0
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|Ayes:|Hayashi, Emmerson, |Ayes:|De Leon, Conway, Ammiano, |
| |Conway, Eng, | | |
| |Hernandez, Nava, Niello, | |Charles Calderon, Coto, |
| |John A. Perez, Ruskin, | |Davis, Duvall, Fuentes, |
| |Smyth, | |Hall, Harkey, Miller, |
| |Monning | |John A. Perez, Skinner, |
| | | |Solorio, Audra |
| | | |Strickland, Torlakson, |
| | | |Hill |
|-----+--------------------------+-----+--------------------------|
| | | | |
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SUMMARY : Prohibits a public entity from retaining more than 5%
of a contract price until final completion and acceptance of a
project. Specifically, this bill :
1)Defines "public entity" to mean the state, including every
state agency, office, department, division, bureau, board, or
commission, the California State University, the University of
California (UC), a city, county, city and county, including
chartered cities and chartered counties, district, special
district, public authority, political subdivision, public
corporation, or nonprofit transit corporation wholly owned by
a public agency and formed to carry out the purposes of the
public agency.
2)Requires that retention proceeds between an original
contractor and a subcontractor, or between two subcontractors,
shall not exceed 5% of payment or contract price. Does not
apply if the contractor provides written notice to the
subcontractor, prior to or at the time that the bid is
requested, that a bond may be required and the subcontractor
subsequently is unable or refuses to furnish to the contractor
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a performance or payment bond issued by an admitted surety
insurer.
3)Provides that these provisions shall apply to all contracts
entered into on or after January 1, 2010, between a public
entity and an original contractor, between an original
contractor and a subcontractor, and between all
subcontractors, relating to public works projects.
EXISTING LAW :
1)Requires payments on contracts with progress payments to be
made as the awarding department prescribes; provides that
state and public agencies 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 actual work completed,
except as follows:
a) At any time after 95% of the work has been completed on
a state project, the state may reduce the funds withheld to
an amount not less than 125% of the estimated value of the
work yet to be completed, as specified;
b) Allows a public entity to withhold 150% of the value of
any disputed amount of work from the final payment; and,
c) At any time after 50% of a local government project is
completed and the legislative body finds that satisfactory
progress is being made, it may reduce or eliminate
withholding.
2)Provides that retention proceeds between a original contractor
and a subcontractor, or between two subcontractors, not exceed
the percentage specified in the contract between the public
entity and the original contractor, and requires an original
contractor to distribute retention proceeds to subcontractors
within seven days of receiving retention proceeds from the
public agency.
3)Requires a contractor in a public works contract to file a
performance bond with the public entity in specified amounts,
depending on the value of the contract.
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4)Requires every original contractor who is awarded a contract
by a state entity involving expenditures greater than $5,000
for any public works project, to file a performance bond with
the state entity in a sun equal to or greater than the
contract's total payable amount.
FISCAL EFFECT : According to the Assembly Appropriations
Committee, 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
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.
2)UC has a 5% retention practice. The California Department of
Transportation (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.
3)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 : According to the author's office, "SB 802 aims to
help smaller California contractors compete for bids on public
works projects by capping the amount of retention funds which
can be withheld. Existing law requires that not less than 5% of
the total payment for time and materials on a public works
project be withheld (Public Contract Code (PPC) Section 10261).
This policy unnecessarily disadvantages small contractors who,
on many occasions, find the amount of retention withheld exceeds
10% of the total cost of the project. While this might not
sound like much at first, in reality the typical profit margin
for the construction industry on these projects is only about 3%
or 4%. This means that contractors must finance up to 7% of the
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total project on their own dime. 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."
Retention proceeds represent a percentage of the amount of a
contract that is withheld from a progress payment by the public
entity to the original contractor, or the original contractor to
one its subcontractors. 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 5%
of payment until the contract is completed to the satisfaction
of the public entity or original contractor.
Current law allows for the retention of a percentage of a
contract price to guaranty a contractor's completion and
acceptance of a project. All California contractors working on
a public works project are required to possess performance bonds
that cover up to 150% of the cost of any disputed work.
Contractors have an incentive to complete projects without
conflict, because it becomes more difficult to find a bonding
agency willing to bond a contractor who has failed a project.
Performance bonds can be one option a public entity uses to
guarantee that a project will continue to proceed, should a
contractor fail. If a contractor does not meet the contract
obligations and the public entity seeks to use the performance
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bonds, the bonding company will seek selects the replacement
contractor to complete the remainder of the contract obligations
at the lowest cost.
According to the author's office, the following states have
capped retention rates at 5%: Arizona, Delaware, Hawaii, Idaho,
Iowa, Maine, Massachusetts, Minnesota, Mississippi, Missouri,
Montana, New York (for bonded contractors), Oregon, Rhode
Island, Utah, Virginia, and Washington.
Supporters argue that retention ties up capital in the current
economy and that there are already many protections in place to
guarantee project completion. The sponsor contends that failure
to complete a project ruins a contractor's reputation and
results in occupational suicide. According to supporters, in
order for contractors to compensate for the additional loan
interest for labor and materials resulting from retention,
contractors may factor in these costs in their contract bids and
therefore increase taxpayer costs for a project. The sponsor
also notes that the federal government does not use retention on
Caltrans projects and that some cities and counties already cap
retention at 5%.
Opponents argue that schools need a guarantee that projects will
be completed on time because schools need to be built according
to strict specifications because they are also used as emergency
shelters. Opponents contend that schools will usually leave a
"punch list" of outstanding concerns to work with the contractor
towards the end of a project as to not hold the project up; the
opponents claim that discretionary retention is appropriate
because retention of 5% or less, depending on the situation, may
not be financially enough to commit the contractor to complete
the remainder of the project according to specifications.
Analysis Prepared by : Joanna Gin / B. & P. / (916) 319-3301
FN: 0002265