BILL ANALYSIS �
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|SENATE RULES COMMITTEE | SB 293|
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UNFINISHED BUSINESS
Bill No: SB 293
Author: Padilla (D)
Amended: 9/2/11
Vote: 21
PRIOR SENATE VOTES NOT RELEVANT
ASSEMBLY FLOOR : Not available
SUBJECT : Payment bonds: laborers
SOURCE : Author
DIGEST : This is a new bill. When it left the Senate it
clarified that, prior to enforcing a payment bond claim,
laborers are exempt from having to serve a preliminary
notice and contained a delayed operative date of July 1,
2012. That language was deleted in the Assembly. As
amended, this bill establishes a four-year limit on
retention in public works projects, with specified
exceptions, and modifies provisions regarding payments to
subcontractors and provisions regarding subcontractor
claims for nonpayment.
Assembly Amendments (1) require a written notice be given
to a surety and the bond principal be given prior to the
completion of the project; (2) prohibit retention proceeds
from exceeding five percent of payment for contracts
entered into on or after January 1, 2012; (3) prohibits
progress payments from being made in excess of 100 percent
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of the actual work completed; (4) provides that a
subordinate contractor, who has not provided a contractor
with a 20 day preliminary bond notice, may not enforce a
claim against the contractor; and 5) add clarifying
language relative to not applying to a subcontractor who
has been terminated from a project and all program payments
were made as of the termination date.
ANALYSIS : Existing law:
1.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 subcontractor's interest therein, as prescribed.
2.Requires, until July 1, 2012, with regard to a contract
entered into on or after January 1, 1995, 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 work preliminary bond notice, as provided.
Existing law further authorizes a claimant, if the 20-day
public work 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.
3.Requires, operative July 1, 2012, a claimant to give a
preliminary notice to enforce his or her claim against a
payment bond given in connection with a private or public
work of improvement, and allows the claimant, if he or
she did not give a preliminary notice, to enforce his or
her claim by giving written notice to the surety and bond
principal 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.
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4.Authorizes the Department of General Services, or any
other department with authority to enter into contracts,
to contract with suppliers for goods and services and for
public works. Existing law provides that in a contract
relating to the construction of a public work of
improvement between the public entity and original
contractor, 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.
5.Contains various provisions relating to contracts for the
performance of public works of improvement, including
provisions for the payment of progress payments and the
disbursing and withholding of retention proceeds.
Existing law prohibits progress payments upon these
contracts from being made in excess of 95 percent of the
percentage of actual work completed plus a like
percentage of the value of material delivered, as
specified, and requires the Department of General
Services to withhold not less than five percent of the
contract price until final completion and acceptance of
the project.
This bill 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 five percent of a contract price until final
completion and acceptance of a project.
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 writing.
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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 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 five
percent 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 five 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.
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6.Prohibits progress payments on public works contracts
from being made in excess of 100 percent of the
percentage of actual work completed.
7.Authorizes a public entity to retain more than five
percent 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, 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.
1.Sunsets these retention provisions on January 1, 2016.
2.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.
Prior Legislation
AB 2216 (Fuentes), which failed passage on the Senate Floor
on 8/31/10 (17-9). In 2009, SB 802 (Leno), which limited
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retention for five percent, was vetoed by Governor
Schwarzenegger, who expressed concern that such a limit
would harm public agencies' ability to complete project on
time and within budget. In 2008, an identical bill (SB
619, Migden) passed the Assembly but was held and not sent
to the governor. Several bills with similar retention
limitations have been vetoed: AB 806 (Keeley) of 1999; AB
940 (Miller) of 1997; and AB 1949 (Conroy) of 1996.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Assembly Appropriations Committee,
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.
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 five percent is an
exception on state projects, and is used generally only on
smaller projects.
The University of California has a five percent retention
practice. 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.
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
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argues that in these situations, it is preferable to
ratchet up the retention level above five percent rather
than attempt to seek reimbursement on the back end of a
project.
The fiscal impact on local governments could be more
significant as they are generally more likely to use a
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. 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.
SUPPORT : (Verified 9/7/11)
Air-conditioning & Refrigeration Contractors Association
Associated General Contractors of California
Building Industry Credit Association
California chapters of the National Electrical Contractors
Association
California Landscape & Irrigation Council
California Legislative Conference of Plumbing, Heating, and
Piping
Industry
California State Council of Laborers
Concrete Contractors Association, Inc.
Engineering & Utility Contractors Association
Golden State Building Exchange
Los Angeles Department of Water and Power
Roofing Contractors Association of California
State Building and Construction Trades Council
Union Roofing Contractors
OPPOSITION : (Verified 9/7/11)
Alameda County Flood Control and Water Conservation
District
American Contractors Indemnity Corporation
Association of California Construction Managers
Association of California Healthcare Districts
Association of California School Administrators
Association of California Water Agencies
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California Association of Sanitation Agencies
California Association of School Business Officials
California School Boards Association
California Special Districts Association
California State Association of Counties
California State University
City and County of San Francisco
City of Visalia
City of Wasco
Coalition for Adequate School Housing
Community College Facility Coalition
County Sanitation Districts of Los Angeles County
Desert Water Agency
East Valley Water District
El Dorado Irrigation District
League of California Cities
Long Beach Unified School District
Public Cemetery District No. 1 of Kern County
Riverside County School Superintendents' Association
Small School Districts Association
Three Valleys Municipal Water District
Union Roofing Contractors Association
Urban Counties Caucus
ARGUMENTS IN SUPPORT : According to the author's office,
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 reduction to seven
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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.
ARGUMENTS IN OPPOSITION : 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 percent of the contract
value. If a contractor and a public agency wish to limit
retention proceeds to five percent, 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
five percent, 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
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contracts are fully executed.
RJG:nl 9/7/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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