BILL ANALYSIS �
AB 2021
Page 1
Date of Hearing: May 8, 2012
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 2021 (Wagner) - As Amended: March 29, 2012
SUBJECT : WORKS OF IMPROVEMENT: DISPUTED AMOUNTS
KEY ISSUE : SHOULD STATUTES RELATING TO RETENTION BY AN OWNER OR
CONTRACTOR OF DISPUTED AMOUNTS DUE TO A CONTRACTOR OR
SUBCONTRACTOR BE CLARIFIED BY BETTER DEFINING WHAT CONSTITUTES A
DISPUTED AMOUNT?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This bill, sponsored by construction contractors, proposes to
clarify the "prompt-pay" statutes regarding works of
improvement. Supporters maintain that it would bring needed
certainty to the amounts that can be withheld by owners,
contractors and subcontractors from those to whom they owe
payment. The bill is substantially similar to a prior measure,
AB 2549 of 2004, which passes this Committee but was vetoed by
the Governor. There is no known opposition.
SUMMARY : Revises the law with respect to exclusions from
progress payments as well as the allowable amount of retention
proceeds for works of improvement. Specifically, this bill
would increase the amount that may be withheld from progress
payments and retentions to the sum of liquidated damages owed by
the subcontractor and 150 percent of the estimated cost of
repair or replacement of subcontract work that was not performed
according to the subcontract or comparable sums where mechanics'
liens and other claims are involved, depending on specified
circumstances.
EXISTING LAW contains various provisions relating to contracts
for the performance of private and public works of improvement,
including provisions for the withholding and disbursement of
retention proceeds, and provides that, with respect to those
contracts for works of improvement, the retention proceeds
withheld from any payment may not exceed 150 percent of the
disputed amount. (Business and Professions Code section 7108.5;
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Civil Code sections 8800, 8812 and 8814.)
COMMENTS : According to the author:
The Prompt Pay statutes are turning into a mess of
loopholes. They provide no relief to contractors against a
sophisticated owner. Worse, they provide those owners with
excuses for withholding more money due to a loophole within
the existing statute. Unfortunately, "disputed amount" is
not defined in the statute. As a result, virtually every
construction attorney is running into these kinds of
things:
A). The owner orders time and material extra work. Daily
tickets are signed by the owner's jobsite representative
confirming that the equipment and labor actually performed
the extra work. When the extra work is completed, the
contractor submits an invoice for $10,000 (for example) for
the extra work. That invoice is the product of what the
contractor thought were agreed upon labor rates multiplied
by the labor hours on the tickets and what the contractor
thought were the agreed upon equipment rates multiplied by
the equipment hours on the tickets.
The owner decides the total is too much, so he declares
this to be a disputed amount. Not only does the owner NOT
pay for the extra work, but because it is a "disputed
amount," the owner withholds what the law provides which is
150% of that amount, i.e. $15,000, from money otherwise
due. In other words, if the contractor had never performed
the extra work, that $15,000 would never have been withheld
from money otherwise due. However, since the contractor
did $10,000 in extra work, his cash flow is now reduced by
$25,000 ($10,000 paid out for the labor and equipment for
the extra work PLUS the $15,000 "disputed work" withhold).
While this action is blatantly unfair on the part of an
owner, the language in the existing prompt pay statutes
appears to sanction it - and sophisticated owners are using
this loophole in the law.
B). The job is delayed. The causes of the delay are
disputed. The owner assesses liquidated damages of
$10,000. The contractor contests this assessment. The
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owner, in-turn, declares this to be a "disputed amount" and
withholds NOT the $10,000, but 150% of the $10,000, i.e.
$15,000, because the contractor has disputed the liquidated
damages assessment. Once again, the language in the
existing prompt pay statutes appears to sanction this
loophole in the law.
C). A cost-plus job is performed. Under the agreement, the
owner must pay all of the costs of the work. A dispute
develops near the end of the job. In response, the owner
stops paying and the contractor pulls off the job. The
owner now hires another contractor to finish the work at a
cost of $10,000 (for example). The owner then contends
that the $10,000 it paid to the other contractor - money it
would have had to pay the original contractor under the
cost-plus contract - is a disputed amount. Thus, the owner
uses that argument to justify withholding $15,000 from what
is still owed to the original contractor for costs of the
work done by the original contractor
In summary, not only are owners using these kinds of
arguments to withhold payment, but they are also using them
to avoid the prompt payment penalties that were supposed to
assure prompt payment.
AB 2021 is intended to correct this major loophole in the
current prompt pay statutes by defining disputed amount.
This will ensure that the process is fair and equitable to
all sides.
Substantially Similar Prior Measure Vetoed . AB 2549 of 2004 was
a nearly identical measure, although it applied to both public
and private projects, while this bill relates only to private
works. That measure was vetoed by Governor Schwarzenegger who
stated:
While I understand the arguments behind this measure, I
believe the nuances of the changes proposed may be too
complex for many Californians who hire contractors to
perform private works of improvement on their homes and
private property.
Existing law, including lien protections and other prompt
pay requirements, afford most contractors with sufficient
protection to ensure payment on disputed payments.
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Additionally, I believe this bill will only further
complicate the various disparate statutes
regarding disputed payments between contractors and owners.
This area of law that is very important to both the
consumer and contractor has been amended piecemeal for far
too long.
I am asking the Legislature to work on crafting a measure
that would, not only simplify existing law, but ensure that
California consumers are adequately protected and that
contractors continue to be treated fairly while providing a
consolidation and reform of this entire body of law.
REGISTERED SUPPORT / OPPOSITION :
Support
Engineering Contractors' Association (co-sponsor)
California Chapter of American Fence Association
California Fence Contractors' Association
California Professional Association of Specialty Contractors
Flasher Barricade Association
Marin Builders Association
Opposition
None on file
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334