BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 802|
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VETO
Bill No: SB 802
Author: Leno (D)
Amended: 9/4/09
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
SENATE FLOOR : 35-0, 5/6/09
AYES: Alquist, Ashburn, Benoit, Calderon, Cogdill, Corbett,
Correa, Cox, Denham, Ducheny, Dutton, Florez, Hancock,
Harman, Hollingsworth, Huff, Kehoe, Leno, Liu, Lowenthal,
Maldonado, Negrete McLeod, Oropeza, Padilla, Pavley,
Romero, Simitian, Steinberg, Strickland, Walters,
Wiggins, Wolk, Wright, Wyland, Yee
NO VOTE RECORDED: Aanestad, Cedillo, DeSaulnier, Runner,
Vacancy
SENATE FLOOR : 39-0, 9/10/09
AYES: Aanestad, Alquist, Ashburn, Benoit, Calderon,
Cedillo, Cogdill, Corbett, Correa, Cox, Denham,
DeSaulnier, Ducheny, Dutton, Florez, Hancock, Harman,
Hollingsworth, Huff, Kehoe, Leno, Lowenthal, Maldonado,
Negrete McLeod, Oropeza, Padilla, Pavley, Price, Romero,
Runner, Simitian, Steinberg, Strickland, Walters,
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SB 802
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Wiggins, Wolk, Wright, Wyland, Yee
NO VOTE RECORDED: Liu
ASSEMBLY FLOOR : 75-1, 9/9/09 - See last page for vote
SUBJECT : Works of improvement: progress payments:
notice:
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
General Services to withhold not more than five percent of
the contract price until final completion and acceptance of
the project.
Assembly Amendments (1) reduce the time required for a
prime contractor or subcontractor to pay any subcontractor,
to no later than seven days of receipt of each progress
payment; (2) sunset the five percent retention provisions
for public works projects on January 1, 2014; (3) increase
the limit on progress payments on public works projects to
not exceed 100 percent of the percentage of actual work
completed and sunsets these provisions on January 1, 2014,
thereby returning the limit back to 95 percent; (4) make
clarifying changes; and (5) add a co-author.
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.
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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
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:
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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 percent 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 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.
4. Reduces the time required for a prime contractor or
subcontractor to pay any subcontractor, to no later than
seven days of receipt of each progress payment.
5. Sunsets on January 1, 2010, provisions stating that if
the 20-day public work preliminary bond notice was not
provided, as specified, a claimant may enforce a claim
by giving written notice to the surety and the bond
principal within 15 days after recordation of a notice
of completion. If no notice of completion has been
recorded, the time for giving written notice to the
surety and the bond principal is extended to 75 days
after completion of the work of improvement.
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6. States that, commencing on January 1, 2010, if the
20-day public work preliminary bond notice was not
provided, as specified, a claimant may enforce a claim
by giving written notice to the surety and the bond
principal, prior to completion of the project, or
recordation of a notice of completion.
7. Sunsets the five percent retention provisions for public
works projects on January 1, 2014.
8. Increases the limit on progress payments on public works
projects to not exceed 100 percent of the percentage of
actual work completed. Sunsets these provisions on
January 1, 2014, and reverts the limit back to 95
percent.
9. Makes technical and clarifying amendments.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
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 five percent is an
exception on state projects, and is used generally only
on smaller projects.
2. UC has a five percent retention practice. The
California Department of Transportation (Caltrans)
contracts funded at least in part with federal monies
(85 percent 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
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retention amount exceeding five percent 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 five percent 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 three percent or four percent. This means that
contractors must finance up to seven percent of the 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."
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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 percent 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 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 five percent: Arizona, Delaware,
Hawaii, Idaho, Iowa, Maine, Massachusetts, Minnesota,
Mississippi, Missouri, Montana, New York (for bonded
contractors), Oregon, Rhode Island, Utah, Virginia, and
Washington.
SUPPORT : (Verified 9/10/09)
California Assoc. of Sheet Metal & Air Conditioning
Contractors' National Assoc. (co-source)
California Legislative Conference of the Plumbing, Heating
and Piping Industry (co-source)
A.O. Reed & Co.
Air Conditioning & Refrigeration Contractors Association
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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.
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
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Western States Council of Sheet Metal Workers
Xcel Mechanical Systems
OPPOSITION : (Verified 9/10/09)
Alameda County Flood Control and Water Conservation
District
Anaheim City School District
Association of California School Administrators
Bonita Unified School District
California Association of Sanitation Agencies
California Association of School Business Officials
California Special Districts Association
California State Association of Counties (CSAC)
City of Fountain Valley
City of Palm Desert
City of Rancho Cucamonga
City of San Luis Obispo
City of Vista
Clovis Unified School District
El Dorado Irrigation District
Evergreen School District
Fremont Unified School District
Fresno Unified School District
Friant Water Authority
Glendale Unified School District
Hemet Unified School District
Humboldt County Office of Education
Inland Empire Utilities Agency
Kern County Water Agency
League of California Cities
Los Angeles Unified School District
Milpitas Unified School District
Morgan Hill Unified School District
New Haven Unified School District
Oceanside Unified School District
Palo Verde Unified School District
Pleasanton Unified School District
Port San Luis Harbor District
Riverside County Office of Education
Riverside County Schools Advocacy Association
Rowland Unified School District
Saddleback Valley Unified School District
San Bernardino City Unified School District
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San Mateo County Harbor District
San Ramon Valley Unified School District
Sanger Unified School District
Santa Clara Valley Water District
Sierra Sands Unified School District
Solano County Board of Supervisors
South Bay Cities Council of Governments
Tahoe Truckee Unified School District
Three Valleys Municipal Water District
Travis Unified School District
Western Placer Unified School District Superintendent
Yosemite Community College District
ARGUMENTS IN SUPPORT : 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 five percent.
ARGUMENTS IN OPPOSITION : 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 five percent
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.
GOVERNOR'S VETO MESSAGE:
"I am returning Senate Bill 802 without my signature.
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Under current law, public entities, at a minimum,
must retain 5 percent of a payment to a contractor
completing a public works project. This bill would
restrict the State's ability to retain more than 5
percent of payment and no more than 5 percent of the
public work contract price.
When a contractor fails to complete a public works
project, the public entity needs recourse to ensure
that the project gets completed. Public works
contracts have a higher level of risk as public
entities usually have to accept the low bidder.
Though there are options available to the State to go
after a contractor who fails to complete the terms of
a public works contract, retaining portions of
payment to the contractor provides incentive for the
contractor to complete the project. While I am
sympathetic with the concerns of subcontractors, the
State's responsibility is to protect the taxpayer to
make certain that public works projects are completed
correctly and within budget; limiting the retention
amount hampers the State's ability to do that.
For these reasons, I am returning this bill."
ASSEMBLY FLOOR :
AYES: Adams, Ammiano, Anderson, Beall, Bill Berryhill, Tom
Berryhill, Blakeslee, Block, Blumenfield, Brownley,
Buchanan, Caballero, Charles Calderon, Carter, Chesbro,
Conway, Cook, Coto, Davis, De La Torre, De Leon, DeVore,
Emmerson, Eng, Evans, Feuer, Fletcher, Fong, Fuentes,
Furutani, Gaines, Galgiani, Garrick, Gilmore, Hagman,
Hall, Harkey, Hayashi, Hernandez, Hill, Huber, Huffman,
Jeffries, Jones, Knight, Krekorian, Lieu, Logue, Bonnie
Lowenthal, Ma, Mendoza, Miller, Monning, Nava, Nestande,
Niello, Nielsen, John A. Perez, V. Manuel Perez,
Portantino, Ruskin, Salas, Saldana, Silva, Skinner,
Smyth, Solorio, Audra Strickland, Swanson, Torlakson,
Torres, Torrico, Tran, Villines, Bass
NOES: Arambula
NO VOTE RECORDED: Duvall, Fuller, Yamada, Vacancy
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TSM:do 1/6/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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