BILL ANALYSIS �
SB 293
Page 1
SENATE THIRD READING
SB 293 (Padilla)
As Amended September 2, 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
contractor or subcontractor must pay a subcontractor after
receiving a progress payment, unless otherwise agreed to in
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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 progress 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, or in the case of a
subcontractor who has been terminated from the project pursuant
to the contract, all such progress payments have been made as of
the termination date, except those disputed in good faith.
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.
7)Authorizes a public entity to retain more than 5% of the
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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, or its designee,
has approved or ratified by 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
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.
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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
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
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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 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
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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%,
except that retention proceeds may exceed 5% on specific projects
where the governing body of the public entity has approved a
finding by a majority vote during a properly noticed and normally
scheduled public hearing and prior to bid that the project is
substantially complex and therefore requires a higher retention
amount than 5%and the awarding entity includes both this finding
and the actual retention amount in the bid documents. This
determination could alternatively be made by the public entity's
designee if properly ratified by the governing body as indicated
above.
The bill is opposed by some local government groups who argue 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. Opponents also
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 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: 0002610
SB 293
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