BILL ANALYSIS �
SB 293
Page 1
SENATE THIRD READING
SB 293 (Padilla)
As Amended August 26, 2011
Majority vote
SENATE VOTE :36-0
BUSINESS & PROFESSIONS 8-0 JUDICIARY
9-0
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|Ayes:|Hayashi, Bill Berryhill, |Ayes:|Feuer, Wagner, Atkins, |
| |Allen, Eng, Hagman, Hill, | |Dickinson, Beth Gaines, |
| |Ma, Smyth | |Huber, Jones, Monning, |
| | | |Wieckowski |
|-----+--------------------------+-----+--------------------------|
| | | | |
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APPROPRIATIONS 17-0
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|Ayes:|Fuentes, Harkey, | | |
| |Blumenfield, Bradford, | | |
| |Charles Calderon, Campos, | | |
| |Davis, Donnelly, Gatto, | | |
| |Hall, Hill, Lara, | | |
| |Mitchell, Nielsen, Norby, | | |
| |Solorio, Wagner | | |
|-----+--------------------------+-----+--------------------------|
| | | | |
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SUMMARY : Adjusts the rights and time periods governing payment
and claims for payment between owners, contractors and
subcontractors by speeding the time period for contractors to
pay subcontractors, reducing the time by which a subcontractor
may make claims for nonpayment against a contractor on a public
works project, exempting laborers from preliminary notification
requirements and any deadline to enforce a claim for private
works of improvement, and prohibiting 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 by which a prime
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contractor or subcontractor must pay a subcontractor after
receiving a progress payment, unless otherwise agreed to in
writing.
2)Requires a subcontractor to give written notice to the surety
and bond principal that he or she is enforcing a claim prior
to completion or recordation of the Notice of Completion (NOC)
of a project, except as specified, if the 20-day public works
preliminary notice was required by any person that has no
direct contractual relationship with the contractor and who
has not given notice as provided in Civil Code Section 3098,
that person may enforce a claim by giving written notice to
the surety and 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. This provision would
not apply in the event that all payments, other than those
disputed in good faith, have been made to a subcontractor who
has a direct contractual relationship with the general
contractor to whom the claimant has provided materials or
services.
3)Exempts a laborer, as defined, from preliminary notice
requirements to a surety and bond principal and any deadline
to enforce a claim after the completion of a project for
private works of improvement.
4)Prohibits a public entity from retaining more than 5% of a
contract price until final completion and acceptance of a
project.
5)Requires that retention proceeds between an original
contractor and a subcontractor, or between two subcontractors,
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 a performance or
payment bond issued by an admitted surety insurer.
6)Prohibits progress payments on public works contracts from
being made in excess of 100% of the percentage of actual work
completed.
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7)Authorizes a public entity to retain more than 5% of the
contract price in public works projects under the following
conditions:
a) For projects awarded by state departments, as defined,
the project is substantially complex and the department
includes this finding and the actual retention amount in
the bid documents;
b) For projects awarded by local entities, as specified,
the governing body of the local public entity has approved
a majority vote during a properly noticed and normally
scheduled public hearing prior to bid that the project is
substantially complex, and includes this finding and the
actual retention amount in the bid documents; and,
c) Retention proceeds between an original contractor and a
subcontractor, or between two subcontractors, shall not
exceed the specified retention percentage in the contract
between the public entity and the original contractor.
8)Sunsets these retention provisions on January 1, 2016.
9)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, 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.
FISCAL EFFECT : According to the Assembly Appropriations, 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)In most cases, the fiscal impact to the state would likely be
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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)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.
3)The exception at the state level is the California State
University (CSU), which is opposed to this bill and argues
that limiting retention will remove a tool available to
protect against contractor non-performance. CSU cites the
example of an $18 million project that, based on the current
schedule is projected to finish two years behind schedule.
Were this bill in effect, about $900,000 in retention would be
withheld, but the university would be entitled to almost $2
million in liquidated damages for late completion. This would
leave CSU $1.1 million short, which might have to be recovered
from the contractor through legal means, thus entailing even
more costs. CSU argues that in these situations, it is
preferable to ratchet up the retention level above 5% rather
than attempt to seek reimbursement on the back end of a
project.
4)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. In addition,
unlike previous legislation proposed to limit retention, this
bill allows local governments, as well as state agencies, to
establish higher retention on projects they deem to be
complex.
COMMENTS : According to the author this bill presents a
multi-prong approach to assisting the state's ailing
construction industry.
The bill relates to payments made to individuals hired to
perform work on public and private construction projects, and
the cash flow between public entities and homeowners, general
contractors, subcontractors, and suppliers. This bill also
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revises the terms and conditions, as well as the timeframe in
which those payments must be made. Below are the primary
components of the measure relating to payments discussed below:
progress payments, claims to the surety and bond principal for
both private and public works, and retention.
The bill reduces the time period a general contractor has to pay
his or her subcontractor after the general contractor 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 seven days will have any significant impact.
In public works projects, instead of a lien claim, there are
claims that can be made against the surety and bond principal,
referred to as a bond claim. Subcontractors routinely file this
preliminary notice prior to the commencement of work and
receiving payment for services as a protective measure to inform
the surety or public entity that work will be performed for
payment. If a subcontractor files this 20-day preliminary
notice and is not paid after 10 days of supplying labor and
materials, the subcontractor can file a stop notice with the
public entity to withhold the disputed amount from the general
contractor. The public entity will only release the withheld
amount to the general contractor once a stop notice release is
received from the claimant attesting that payment for service
has been rendered.
However, if a subcontractor does not file a 20-day preliminary
notice, provides labor and services, and is not paid, the
subcontractor is ineligible to file a stop notice with the
public entity. The subcontractor must wait until the project is
completed or until a NOC is filed to submit a claim to the
surety for payment of services. This means, that even if a
project is not completed until a year after an unpaid
subcontractor provides labor or materials, but the subcontractor
did not file a 20-day preliminary notice, that subcontractor
will have to wait a year before receiving payment through a
surety. In this case, the subcontractor can make a claim within
15 days after recordation of a NOC, or if no NOC has been
recorded, up to 75 days after the NOC.
Many public entities require that contractors carry a payment
bond to ensure that contractors pay all debt related to a
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construction project. This bill would clarify the exemption for
public and private works project laborers from the preliminary
notice requirements regarding payment bond claims. Under
existing law, laborers are exempt from the preliminary notice
requirements on private and public works projects. Existing law
requires a preliminary notice to be served prior to enforcement
of a payment bond claim in accordance with Civil Code Sections
8200 (private works) or 9300 (public works).
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 of 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. In practice, the
most common rule is said to be retention of 10%. Under this
bill, the amount public entities could retain would be no more
than 5%.
The bill is opposed by some local government groups. The
California Coalition for Adequate School Housing (CASH) argues
that the bill improperly repeals current statutory flexibility
for public agencies to negotiate the conditions for retention
proceeds in their contracts. School districts, in good faith,
negotiate contract provisions and typical retention amounts are
negotiated at approximately 10% of the contract value. If a
contractor and a public agency wish to limit retention proceeds
to 5% - as the bill seeks to achieve - current law allows for
it. CASH and others argue that retention is necessary for
public agencies to ensure: 1) prompt completion of a project;
2) that contractors return to a project to complete all contract
requirements, including small unprofitable punch-list items; 3)
there are sufficient funds for public agencies to correct
defective work if a contractor fails to do so; 4) to have
sufficient funds to honor Stop notice claims filed by
subcontractors and suppliers; and, 5) to have sufficient funds
withheld in order to pay workers in the event contractors have
failed to properly pay prevailing wage as determined by the
Department of Industrial Relations as required by state law. By
prohibiting contract withholdings from exceeding 5%, and
removing the flexibility to negotiate a good faith provision
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between a public agency and a contractor, this bill
significantly thwarts an agency's ability to ensure that the
provisions of their public works contracts are fully executed.
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334
FN: 0002284