BILL ANALYSIS �
AB 1354
Page 1
Date of Hearing: May 3, 2011
ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER
PROTECTION
Mary Hayashi, Chair
AB 1354 (Huber) - As Amended: April 26, 2011
SUBJECT : Public works: progress payments: notice: retention
proceeds.
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)Decreases, from 10 to 7, the number of days within which a
prime contractor or subcontractor must pay a subcontractor
after receiving a progress payment, unless otherwise agreed to
in writing.
2)Requires, in public works projects, a claimant to give written
notice to the surety and bond principal that he or she is
enforcing a claim prior to completion, or recordation of
notice of completion, of the project, commencing January 1,
2012.
3)Prohibits, in public works projects, an original contractor or
subcontractor from retaining more than 5% of payment or
contract price from a subcontractor, and more than the
retention percentage between the public entity and original
contractor, and:
a) Does not apply when subcontractors fail to provide proof
of a performance or surety bond to satisfy a contractor's
written notice prior to a bid request, as specified.
b) Applies to contracts entered into between January 1,
2012 and January 1, 2016.
c) Sunsets the 5% retention provisions for public works
projects on January 1, 2016.
4)Requires the Department of General Services (DGS), until
December 31, 2005, to retain no more than 5% of the contract
price until final completion and acceptance of the project,
and authorizes DGS, once the project is completed, to reduce
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the amount retained to no less than 125% of the value of work
to be completed. Sunsets these provisions on January 1, 2016.
5)Requires DGS, commencing January 1, 2016, to retain no less
than 5% of the contract price until final completion and
acceptance of the project, and authorizes DGS, once the
project is 95 % completed, to reduce the amount retained to no
less than 125% of the value of work to be completed.
6)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.
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 an original
contractor and a subcontractor, or between two subcontractors,
not exceed the percentage specified in the contract between
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the public entity and the original contractor, and requires an
original contractor to distribute retention proceeds to
subcontractors within 10 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.
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 sum equal to or greater than the
contract's total payable amount.
5)Requires that, for private and public works of improvement,
and in a public works contract, a prime contractor or
subcontractor pay to any subcontractor, not later than 10 days
after receipt of each progress payment, unless otherwise
agreed to in writing, the respective amount allowed the
contractor on account of the work performed by the
subcontractors, to the extent of each contractor's interest
therein, as prescribed.
6)Requires, with regard to a contract entered into on or after
January 1, 1995, that in order to enforce a claim upon any
payment bond given in connection with a public work, that a
claimant give the 20-day public works bond preliminary notice,
as provided. Existing law further authorizes a claimant, if
the 20-day public works preliminary bond notice was not given
as prescribed by statute, to enforce a claim by giving written
notice to the surety and the bond principal, as provided,
within 15 days after recordation of a notice of completion, or
if no notice of completion has been recorded, within 75 days
after completion of the work of improvement.
FISCAL EFFECT : Unknown
COMMENTS :
Purpose of this bill . According to the author's office, "This
bill seeks to provide a relief to the construction industry by
limiting contractor retentions in public works construction
projects to 5%. Current law requires public agencies to retain
a minimum of 5% of the total cost of a public works contract
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(except for Department of Transportation projects - 0%
retention) as an assurance for the timely completion and quality
of the contractor's work. Though retainage serves as a type of
insurance for a public agency, it has the unfortunate effect of
requiring contractors to complete work without full payment.
This practice requires contractors in essence to finance the job
themselves, making it difficult to timely pay their own
creditors, employees and purchase materials.
"The sponsor, the American Subcontractors Association, indicates
profit margins in the construction industry are now typically
less than 2%. Excessive retention by public agencies on the
industry at this time makes it difficult for many contractors to
stay in business. Under this bill, a contractor or
subcontractor that has completed its work and the public agency
has approved that work as satisfactory, the contractor or
subcontractor would be paid at least 95% of the amount owed.
Ensuring that retention is limited to 5% helps keep those in the
construction industry working.
"In addition to retention, public agencies already have many
tools to ensure contractor compliance and protect taxpayers
dollars, such as prequalifying contractors prior to the bid
process, ensuring they are in good standing and known for
quality work; requiring contractors to provide performance bonds
to ensure faithful completion of a project; and withholding from
progress payments to contractors an amount up to 150% of the
value of any disputed work."
Background .
Retention . 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
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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
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.
Liens & Bond Claims . In private works, any person who provides
construction services or materials to a construction project has
the right to file a lien on the property if they are not paid;
however, prior to filing the lien, a 20-day preliminary lien
notice must be filed with the owner and general contractor
identifying the contractor and notifying the owner and general
contractor of the potential lien claim. This must be done
within 20 days from first furnishing labor or materials. After
an owner files a notice of completion, a contractor has 60 days
to record a lien and a subcontractor or materials supplier has
30 days.
In public works, instead of a lien claim, there are claims that
can be made against the surety bond, referred to as a bond
claim. The 20-day notice applies in public works, but even if
the notice is not filed, the contractor can make a claim within
15 days after recordation of a notice of completion, or if no
notice of completion has been recorded, up to 75 days after the
notice of completion. This bill revises this timeline to
require the bond claim be filed before the final notice of
completion. The author's office argues that this change avoids
general contractors from being hit by "surprise" claims.
Progress Payments . This bill also reduces the time period a
general contractor has to pay his or her subcontractor after the
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general has been paid a progress payment from the owner. This
time period is reduced from 10 to 7 days. It is unclear what
percentage of payments occur in the last 3 days of this window,
and whether the reduction to 7 days will have any significant
impact.
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.
Support . According to the sponsor, American Subcontractors
Association California, Inc., "Reducing retention increases cash
flow which enables contractors to purchase materials instead of
taking out loans; this leads to lower bids. Lower retentions
also keep people working instead of being laid off due to lack
of cash flow to the contractors. Because contractors' profit
margins are typically much less than 5%, any retention above
this amount is an unfair withholding of the contractors' own
money. "
According to the California Landscape Contractors Association
(CLCA), "Most public agencies today withhold at least 5% of the
contract, and prime contractors in turn withhold the same
percentage from the various subcontractors on the project. In
some instances, the retention amount has been as high as 10% of
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the contract price. Agencies often withhold retention proceeds
long after the project is completed and drag out final approvals
for months, and sometimes years, before the prime contractor and
subcontractors are fully paid. Because profit margins on public
works contracts are usually less than 5%, contractors are often
required to borrow money to pay for employee wages and materials
while awaiting final payment from the contracting agency. For
smaller contractors, delays in final payment can be fatal if
credit is unavailable or the delay becomes so lengthy that
interest expenses erase profit margins.
"CLCA believes that retention amounts of more than 5% are
unnecessary to ensure satisfactory performance of a contract
because of the overlapping protections provided by the
performance bond. �CLCA] also notes that CalTrans, which has
eliminated retentions on federally-funded highway projects, has
not encountered any difficulties with contractor performance.
In addition, because of the risk of a long retention of proceeds
after completion of a public works project, contractors tend to
factor these additional costs into their bids, resulting in
taxpayer costs that are higher than necessary."
Opposition . According to a coalition of opponents, "AB 1354
puts scarce resources for schools, hospitals, parks, fire
houses, and other public infrastructure at risk. Contract
retention ensures that: public projects are delivered on time
and on budget; contractors complete all contract requirements,
including small unprofitable punch-list items; there are
sufficient funds to correct defective work if a contractor fails
to do so; and, there are sufficient funds to pay workers in the
event contractors fail to pay prevailing wage properly. A 5%
retention cap diminishes out ability to ensure that the
provisions of our construction contracts are fully executed, and
therefore our ability to protect state and local taxpayer
dollars.
"Supporters assert that this bill is in response to the downturn
in the economy; however, this is the eighth attempt to enact
this legislative proposal, the first of which dates back to
1996. We do not believe that this legislation is in response to
the hard economic times, rather a solution in search of a
problem? Current law provides contractors the ability to
establish escrow accounts that allow retention proceeds to gain
interest payments for the contractor while providing adequate
assurance to the public agency that the project will be
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completed. Additionally, local agencies commonly reduce
retention to 5% at the half-way point of project completion, if
adequate progress is being made and the contractor is acting in
good faith.
According to the Los Angeles County Board of Supervisors, "The
Los Angeles County Department of Public Works (DPW) states that
retention funds may be used to satisfy the claims of unpaid
subcontractors and suppliers, fund the cost of completing the
work if the contractor fails to do so, and to fund the cost of
emergency work or work performed by an agency when the
contractor fails to respond. Also, the amount of liquidated
damages may be withheld from the amount of retention paid. DPW
states that AB 1354 would remove a major incentive for
completion, would eliminate the value of stop notices and a
subcontractor's or supplier's right to place a lien against
retained funds, would make collection of liquidated damages more
difficult, and would eliminate a tool for general contractors to
ensure the completion of work by their subcontractors."
Previous Legislation . AB 2216 (Fuentes) of 2010 would have
reduced the time available to a claimant to give written notice
that he or she is enforcing a claim against a bond for a public
works project, and decreases the time period during which a
contractor must pay his or her subcontractors. This bill was
held on the Senate Floor.
SB 802 (Leno) of 2009 was a similar bill that would have
prohibited a public entity from retaining more than 5% of a
contract price until final completion and acceptance of a
project. The Governor vetoed this bill with the following
message:
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;
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limiting the retention amount hampers the State's ability
to do that.
AB 396 (Fuentes) of 2009, would have reduced the time available
for a claimant to make a claim against a bond by providing that
if a claimant has not provided a 20-day public work preliminary
bond notice as specified, the claimant may enforce a claim by
giving written notice to the surety and bond principal prior to
the completion of the project or recordation of a notice of
completion. This bill was held in the Assembly Appropriations
Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
American Subcontractors Association California, Inc. (sponsor)
AAA Fence Company, Inc.
Brady Company/Los Angeles, Inc.
Burnett & Sons
California Landscape Contractors Association
Chula Vista Electric
Construction Industry Legislative Council
Construction Preliens & Paperwork
Delta Electrical Construction, Inc.
Dowdle & Sons Mechanical, Inc.
Dynamic Forecast Co., Inc.
Masonry Concepts, Inc.
Partition Specialties, Inc.
PTS Masonry, Inc.
Surety Associates of Southern California
Swiridoff Construction Co.
Opposition
Anaheim City School District
Association of California Construction Managers
Association of California Healthcare Districts
Association of California Water Agencies
Associated General Contractors
Banta Elementary School District
Beaumont Unified School District
California Association of Joint Powers Authorities
California Association of Sanitation Agencies
California Special Districts Association
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California State Association of Counties
City of Lakewood
Coalition for Adequate School Housing
Community College Facility Coalition
Construction Employers' Association
Corona-Norco Unified School District
County Sanitation Districts of Los Angeles County
County School Facilities Consortia
Desert Water Agency
East Valley Water District
El Dorado Irrigation District
Fresno Unified School District
Irvine Ranch Water District
League of California Cities
Los Angeles County Board of Supervisors
Los Angeles Unified School District
Regional Council of Rural Counties
Riverside County Superintendent of Schools
San Marcos Unified School District
Three Valleys Municipal Water District
Tracy Unified School District
Analysis Prepared by : Joanna Gin / B.,P. & C.P. / (916)
319-3301