Author Archives: Ali Salamirad

HOW CALIFORNIA’S RETENTION LAWS ON PUBLIC WORKS PROJECTS IMPACT PROJECT COMPLETION

In 2012, California made sweeping changes to its retention laws on public works projects.  These changes (Public Contract Code sections 7200, et. seq.) have impacted how contractors are able to deal with retention and when retention is to be paid.  The following is an overview of some of the retention laws and their practical effects to the contracting community.

California’s Retention Laws

Previously, public agency owners and original (i.e., general) contractors had discretion as to the amount of retention they could withhold on a public works project.  Under most situations, the parties negotiated to withhold ten percent (10%) in retention of the contract amount until completion.  Withholding of ten percent from progress payments was commonly viewed as reasonable and a necessary incentive for the original contractors and subcontractors to complete their respective scopes of work on time.  However, under California’s current retention laws, these parties no longer have such discretion. 

Specifically, for public works contracts entered into on or after January 1, 2012, public agency owners, original contractors and subcontractors are required to withhold no more than 5% retention.  With respect to subcontracts, the amount of withheld retention cannot exceed the amount specified in the contract between the original contractor and the owner. 

Generally, there are two limited exceptions to this new law: (1) if the original contractor required performance and payment bonds in its solicitation for bids and the subcontractor is unable or refuses to furnish the bonds, then the original contractor may withhold retention from that subcontractor in excess of 5%; or (2) if the public agency owner, prior to soliciting bids, finds that the project is “substantially complex”, then the agency may withhold more than 5% provided that the finding and the amount of the retention are stated in the bid documents. 

Moreover, Public Contract Code section 7107, requires original contractors to pay subcontractors their portion of the retention within seven days of the original contractor’s receipt of the retention (as opposed to within 10 days under the prior statute). 

These changes to California’s retention laws do not impact a contractor’s or public agency owner’s right to withhold a portion of retention if a bona fide dispute exists between the parties.  If a bona fide dispute does exist, the public agency owner or original contractor may withhold an amount not to exceed 150 percent of the estimated value of the disputed amount.

How California’s Retention Laws Could Impact Final Payment And Project Completion

For many original contractors and subcontractors the reduced retention is a welcome change to the law.  The reduced percentage of retention allows greater cash flow and financial flexibility, which is critical in this economy.  The increased cash flow can assist contractors when their contract margins are thin or if they have unpaid extra work claims.  Many in the contracting community argue that the additional funds created by reducing the percentage of retention will provide contractors with necessary additional resources to timely complete their projects. 

However, what payees consider to be the benefits associated with the changes in the retention laws also create issues for the payors.  For owners and original contractors, the ability to use the 10% retention as leverage to incentivize the completion of difficult projects or to remediate defective or non-conforming work has been diminished.  This loss of leverage, especially on problematic projects, may impact the owner’s and original contractor’s ability to timely complete the project.

Furthermore, because the original contractor is now required to pay within 7 days of receipt of the retention, it is critical that the original contractor ensure that the subcontractors have furnished all of their project closeout documents and resolved any disputed warranty work prior to final payment.  While the original contractors can withhold a portion of the retention based upon a bona fide dispute, estimating the amount in dispute and determining whether a bona fide dispute exists can lead to litigation.    

In addition to the loss of leverage, the two exceptions to California’s retention laws also create additional concerns.  Both of these exceptions have yet to be defined by the courts and leave significant room for interpretation.  For example, a public agency owner can withhold a greater percentage of retention if the owner, prior to soliciting bids, finds that the project is “substantially complex.”  Unfortunately, the new statutes do not define how a public agency is to determine whether its project is “substantially complex.”  Indeed, it is unclear if all public agencies are held to the same standard for making the finding regardless of their sophistication or experience with prior complex projects. 

As to the second exception, Public Contract Code section 7201provides that the original contractor may withhold retention in excess of 5% if the original contractor has provided, prior to bid, written or published notice that the subcontractor is required to provide payment and performance bonds as part of its contract requirements.  However, this section incorporates Public Contract Code section 4108, which is part of California’s subcontractor substitution laws. 

Under Public Contract Code section 4108, it is the responsibility of the subcontractor to submit performance and payment bonds if the original contractor includes a “written or published request” for the bonds in its solicitation for sub-bids and includes specific information regarding the bond requirements.  If the subcontractor fails to provide the bonds pursuant to the original contractor’s request, then the original contractor may reject the subcontractor’s bid and substitute another subcontractor.

The relevant statutes do not address verbal solicitations of bids or the specific requirements of the bonds that are to be included in the notice.  Because original contractors frequently require bonds from subcontractors that they do not have a prior working relationship or suspect will have difficulties completing their scope of work, it is critical that original contractors be careful to review the statutory requirements before soliciting bids from subcontractors.  An original contractor’s failure to comply with these statutes could result in the contractor losing its ability to withhold more than 5% retention. 

 

CONSTRUCTION LAW ALERT

*CONSTRUCTION LAW ALERT* – Effective July 1, 2014, Public Contract Code § 4104 has been amended to now require that all contractors disclose the Contractors State License Board license numbers of their listed subcontractors on public works project bids.  Inadvertent errors in license number listings must be corrected within 24 hours of bid submission in order to avoid a bid protest.  As amended, Section 4104 now reads:

Public Contract Code § 4104.  Any officer, department, board, or commission taking bids for the construction of any public work or improvement shall provide in the specifications prepared for the work or improvement or in the general conditions under which bids will be received for the doing of the work incident to the public work or improvement that any person making a bid or offer to perform the work, shall, in his or her bid or offer, set forth:
(a) (1) The name, the location of the place of business, and the California contractor license number of each subcontractor who will perform work or labor or render service to the prime contractor in or about the construction of the work or improvement, or a subcontractor licensed by the State of California who, under subcontract to the prime contractor, specially fabricates and installs a portion of the work or improvement according to detailed drawings contained in the plans and specifications, in an amount in excess of one-half of 1 percent of the prime contractor’s total bid or, in the case of bids or offers for the construction of streets or highways, including bridges, in excess of one-half of 1 percent of the prime contractor’s total bid or ten thousand dollars ($10,000), whichever is greater.
(2) An inadvertent error in listing the California contractor license number provided pursuant to paragraph (1) shall not be grounds for filing a bid protest or grounds for considering the bid nonresponsive if the corrected contractor’s license number is submitted to the public entity by the prime contractor within 24 hours after the bid opening and provided the corrected contractor’s license number corresponds to the submitted name and location for that subcontractor.
(3) (A) Subject to subparagraph (B), any information requested by the officer, department, board, or commission concerning any subcontractor who the prime contractor is required to list under this subdivision, other than the subcontractor’s name, location of business, and California contractor license number, may be submitted by the prime contractor up to 24 hours after the deadline established by the officer, department, board, or commission for receipt of bids by prime contractors.
(B) A state or local agency may implement subparagraph (A) at its option.
(b) The portion of the work that will be done by each subcontractor under this act. The prime contractor shall list only one subcontractor for each portion as is defined by the prime contractor in his or her bid.
(c) This section shall become operative on July 1, 2014

New Construction Litigation Form Interrogatories

There is a new form on the block…

In January 2013, The Judicial Council of California decided to adopt the use of a new form interrogatory which is geared at streamlining discovery issues in construction litigation cases.

The Civil and Small Claims Advisory Committee recommended the use of the form, while the Consumer Attorneys of California opposed its adoption. The Advisory Committee argued that construction litigation practitioners have urged adoption of form interrogatories for several years, with the goals of eliminating the need for parties to craft special interrogatories for the most commonly asked questions, standardizing those questions so that parties will be aware of what information will have to be provided in the action and, as a result, decreasing the number of motions to compel filed in the courts.

In opposition, the CAOC asserted that the interrogatories would change the nature of the litigation in smaller cases and are not needed in larger construction cases, which are frequently handled in mediation, where a more informal approach to the exchange of information occurs, or as complex litigation matters, in which a Case Management Order is used to guide discovery.

The Practitioner’s Scoop…
One of the main changes to the new construction litigation form interrogatory is the term INCIDENT has been replaced by your choice of either CONSTRUCTION CLAIM or CONSTRUCTION DEFECT CLAIM, depending on what type of case is being handled. The definitions of these terms have been crafted to better fit the circumstances of a construction litigation claim, whereas INCIDENT was over broad and vague in relation to construction claims and related more to personal injury cases.

The form removes all personal injury questions and covers many relevant construction issues. For instance, the form requests information about the licensing of design professionals, subcontractors and contractors. Although Interrogatory 303.7 may not completely eliminate the need to request a contractor’s license history from the CSLB, if its box is checked, then the responding party must provide their entire license history.

The interrogatories question the scope of work of contractors and subcontractors, and ask questions regarding change orders, additional work claims and directives. The interrogatories contemplate inadequate plans and specifications claims -including questions regarding their sufficiency and the contractor’s diligence in obtaining more information.     Other topics introduced on the new forms are manufacturers and products, insurance policies, damages to the subject property, appraisals of the subject property, improvements made tothe subject property, past claims made for damages to the subject property, and individual homeowner claims.

Also—choose wisely— although more construction oriented, once a litigator chooses to use the construction litigation interrogatories he or she cannot use other form interrogatories (such as General Form Interrogatories) in the same action.

Finally, the interrogatories specifically state that they are not intended for use in residential cases involving six or more single-family homes or housing units. Also, the interrogatories are not to be used without leave of court in cases that have been deemed complex under California Rule of Court 3.400 et seq.

Will these forms change the face of construction litigation? Doubtful. But they are now an available tool in the construction litigator’s toolbox.   Have a look at the new construction litigation form interrogatories here:

http://www.courts.ca.gov/documents/disc005.pdf

CONTRACTORS BEWARE – “STRICT COMPLIANCE” WITH PRELIMINARY NOTICE REQUIREMENTS TAKEN TO THE LIMIT

In a recent unpublished California Court of Appeals case, a subcontractor’s preliminary notice was invalidated even though it had been timely and properly served.  The subcontractor served a preliminary notice on a project.   He served the prime contractor and the reputed owner, as required.   He served the notices by certified mail, as required.  He made a proof of service affidavit, as required.  The notices were delivered.   Years later, during litigation, the owner did not deny the notice was dispatched by certified mail.  During his deposition, the owner produced the original preliminary notice that he received, eliminating any doubts about its receipt.

Yet the subcontractor lost his mechanics lien foreclosure action in the trial court—and in the Court of Appeal—for failure to comply with California’s preliminary notice requirements.

Proper service of the notice was one thing, and proper proof of service turned out to be another.   While the subcontractor had fully complied with the service requirements, he could not comply with the proof of service requirements.   Under former Civil Code §3097.1, the proof of service affidavit for a preliminary notice served by certified mail had to be accompanied by one of two things: Either the green certified mail receipt card, or a copy of the record of delivery from the U. S. Postal Service.

The subcontractor had neither one.   The Postal Service admitted that it could not find its record of delivery.  And there never was a green certified mail receipt card, because the notice had been sent by certified mail—as allowed—without return receipt requested.

The subcontractor argued that strict compliance with the proof of service requirement had to be excused where, as here, there was no dispute that the service had been properly made, and where there was no dispute that the notice was actually received.   The Court of Appeal would not do it.   The proof of service statute was clear, and would not allow for judicially-created “excuses.

THING YOU NEED TO KNOW BEFORE JUMPING INTO THE SET-ASIDE MARKET

Preferential contracting programs such as the Small Business Administration’s 8(a), HUBZone, Service-Disabled Veteran-Owned and Women-Owned Business and various Disadvantaged Business Enterprise (“DBE”) programs, have become increasingly attractive to contractors looking for ways to mitigate the impact of the dismal state of the local construction market. 

 
Contractors should be aware that governing agencies, including the SBA, have increased their investigative and enforcement efforts in an effort to combat “procurement fraud.” Therefore, unless you are aware of, and can strictly comply with, all of the requirements of the particular set-aside program, you will be well served to steer clear. 

 
According to recent Senate testimony from the SBA Inspector General, the SBA is committed “to prosecute those who make false statements regarding their eligibility for contracts set aside for small or disadvantaged business and those who fraudulently use front companies to divert profits from set-aside contracts awarded to eligible businesses towards large and non-disadvantaged companies.”

Several recent high-profile cases illustrate the severe ramifications of failing to comply with the rules and regulations of a particular set-aside program. 

 
On March 31, 2011, Skanska USA Civil Northeast, Inc. agreed to pay $19.6 million to resolve criminal allegations that it defrauded the government by failing to properly use DBE subcontractors. Prosecutors alleged that Skanska “effectively self-performed the work … and helped create the appearance that [its DBE subcontractor] had done commercially useful work on the project.” The scheme allowed Skanska to meet its DBE requirements on several projects.

The DBE subcontractor referred to in the Skanska case was Environmental Energy Associates. A grand jury recently indicted the President and Vice President of EEA on fraud and conspiracy charges. The indictment alleges that EEA (1) entered into lucrative subcontracts with Skanska to perform an array of work, (2) knew that it was not capable of performing the work, (3) arranged to have either Skanska or non-DBE third parties perform the work, and (4) falsely submitted payment requests to Skanska for work that EEA never actually performed, for which Skanska then sought and received DBE credit for. The case is still pending.

In November 2010, Schiavone Construction Co., a unit of Dragados-USA, agreed to pay $22.4 million to settle a federal investigation into its practice of submitting reports representing that it was using certified minority, women and disadvantaged business enterprises on public projects. 

 
In October 2010, CSI Engineering and CSI Design Build, two Maryland firms and their president, agreed to pay $200,000 to settle a federal investigation into their work on several HUBZone projects. The HUBZone program generally requires that the contractor maintain its principal office in the designated “underutilized” area and employ 35% of their workforce from there. CSI represented that it satisfied these requirements but clearly did not. 

Also in October 2010, the SBA suspended GTSI Corp., a prominent federal contractor, from performing federal work based on allegations that “GTSI was an active participant in a scheme that resulted in contracts set aside for small businesses being awarded to ineligible contractors.” The government alleged that GTSI entered into arrangements with its partners under which GTSI would perform all of the work on the contract, where the rules require that the disadvantaged partner actually perform parts of the work. The investigation is continuing. In order to remove the suspension pending completion of the investigation, GTSI agreed to remove its CEO and general counsel and turn over internal documents regarding its contracting practices.

Before participating in a set-aside program of any type, Contractors should make certain that they are aware of, and in compliance with, all of the unique requirements of the particular program and agency. This process often involves communicating with the agency’s liaison to confirm compliance. If you are still uncertain, you should contact your attorney who can investigate the statutory requirements and also attempt to identify case examples with similar facts. 

 
As the above examples reveal, failing to comply with the rules can be very costly, so beware. 

If you have any questions about this article, feel free to contact the author at as@salamiradmorrow.com.

CHRISTOPHER M. CULLEN JOINS SALAMIRAD, MORROW, TIMPANE & DUNN LLP

SMTD Law is pleased to announce the addition of veteran construction and surety lawyer Christopher M. Cullen to its growing practice.  Formerly a principal at Lanak & Hanna P.C., Chris represents material suppliers, contractors and sureties in both transactional and litigation matters.  Chris handles the prosecution and defense of a variety of claims and lawsuits related to the construction and surety industries, including the defense of prevailing wage claims on public works projects.  Chris has significant first-chair trial experience.  In addition to his work for contractors and sureties, Chris resolves disputes among businesses and their owners.  Chris can be reached at (949) 477 – 8068 or ccullen@smtdlaw.com.

Salamirad, Morrow, Timpane & Dunn LLP concentrates its practice in construction, government contracts, surety, commercial and debtor-creditor (bankruptcy) law, representing many of the largest and most respected companies in their industries.  

SMTD LAW PARTNER JONATHAN DUNN’S ARTICLE IN CALIFORNIA CONSTRUCTOR MAGAZINE

Please read SMTD Law partner Jonathan Dunn’s article discussing a new case allowing taxpayer suits directly against contractors alleged to have crossed the line from marketing to corruption was published in the Sept/Oct. 2014 edition of Associated General Contractors “California Constructor” Magazine.

https://www.dropbox.com/s/hsiilmyx2hmfi6o/Article%20from%20California%20Constructor%20-%20Contractors%20Beware.pdf?dl=0

EDWARD R. STEPANS JOINS SALAMIRAD MORROW P.C.

Salamirad Morrow P.C. is pleased to announce the addition of veteran construction and surety litigator Edward R. Stepans to its growing practice.  Ed brings twenty-two years of experience handling the prosecution and defense of a variety of claims and lawsuits related to the construction and surety industry.  In addition to his work as a respected litigator, Ed has significant experience reviewing, drafting and updating construction contracts and other project documents.

Ed will be working out of the San Francisco office and may be reached at es@salamiradmorrow.com.

GOLDEN STATE BORING V. EMWD (SAFECO) / SJ BURKHARDT

Congratulations to SMTD partners Jonathan Dunn and Andrew Harris for successfully representing our client in Golden State Boring & Pipe Jacking v. Eastern Municipal Water District, 2014 WL 3615942.  The Court, in a 2-1 decision, held that the period to file suit on a payment bond was six months following the end of the period during which stop notices could be filed, that a cessation of labor on the project for at least 30 days started the suit limitation period, and that the recording of a notice of completion after the time to file stop notices expired did not restart the limitation period.

https://www.dropbox.com/s/83mpzv089thkjv4/Golden%20State%20Boring%20v.%20EMWD.pdf

JOINT VENTURES: THINGS YOU NEED TO KNOW

This article will address the legal, licensing and practical issues that contractors should consider before making a final decision regarding whether to participate in a construction joint venture. 

 
I. The Joint Venture Agreement
Once you have identified a partner and determined that your business interests are best served by joining forces to undertake new work, the parties should document the scope and effect of their joint venture. Joint venture agreements may be as simple or complicated as the situation requires. There are, however, several fundamental issues that should be addressed in your agreement in order to minimize the chances of encountering problems with your joint venture partner in the future.


a. Purpose and scope of the joint venture

It is important to identify the purpose of your joint venture in the agreement. Is the joint venture being created to bid and build a single project or multiple projects? Is the joint venture being created to bid and build a particular type of work of improvement for a particular period of time? Or, are you partnering in order to work for a particular owner? If you do not adequately describe the purpose of your venture, you risk having your new partner claim that it is entitled to profits realized on non-joint venture projects. Conversely, your partner may argue that you are responsible for losses incurred on non-joint venture projects. The best way to avoid these ambiguities is to clearly identify and, indeed, limit, the purpose and intent of the joint venture.

b. Initial contributions and percentage of participation
Your new joint venture will require a cash infusion. Deciding how much each partner is contributing at the outset is important, and should be documented in the agreement. However, the initial contribution may not be as important as deciding the percentage of each party’s participation in profits, losses and liabilities. While it is true that each party is jointly and severally liable to the outside world for the joint venture’s obligations, the internal percentage of ownership and participation among the partners with regard to the profits, losses and liabilities, is determined by the terms of your agreement. Your joint venture agreement should spell out what percentage of interest in the gross profits and share of the losses and/or liabilities of the joint venture each party has. The participation percentage may be the same as each parties percentage of initial contributions, however, it does not need to be, particularly in arrangements where one party is furnishing substantially more “sweat” equity to the venture.

c. Operations and control

Very few construction companies are operated and controlled in the same way. As a result, operation and control disputes between new partners in the joint venture are common and, in many instances, debilitating. Your joint venture agreement should address the management and decision-making structure of the new venture. Generally, these safeguards come into play when a disagreement arises about the direction of the joint venture. For example, in the event of gridlock:

• Who decides whether to bid a particular project?
• Who has the final say on the project estimate?
• Who decides whether to hire and fire employees?
• Who decides to retain or terminate a subcontractor when performance problems arise?
• Who decides whether to invest money to pursue costly project claims or save the litigation cost and waive the right to recover?

• Who decides which services providers to use (e.g. attorneys, bonding agent, insurance agent, banker and accountant)

You may either decide to expressly allocate various responsibilities to each party, or you may decide that in the event of gridlock, one party has the final and conclusive decision making authority, for whatever reason. Either way, it is vital to have these expectations set forth it the agreement before the problems arise.


d. Conflict resolution
Conflicts arise in joint venture arrangements. Your joint venture agreement should include a conflict resolution mechanism that quickly, efficiently and effectively resolves the problem so that the parties can get on with the business of making money. Many agreements require good faith negotiations followed by arbitration, both of which are good options. You may also want to consider selecting a third-party neutral, and identifying him or her in the joint venture agreement as the person designated to facilitate dispute resolution between the parties. Whatever you decide, focus on efficiency and effectiveness because the worst thing that can happen to a joint venture during the course of performing a construction project is an internal dispute.

II. Licensing

Your joint venture will need to have its own license to perform work lawfully in the State of California (other jurisdictions have different licensing requirements). The procedure for is relatively straightforward. The most important rule is that each of the parties to the joint venture must be properly licensed independently. If they are, the joint venture license may be issued in any or all of the classifications in which the members of the joint venture are licensed. Conversely, an unlicensed contractor cannot join forces with a licensed contractor and perform work legally in California. The California joint venture license application may be downloaded at www.cslb.ca.gov.

III. Practical considerations

As with any relationship, formally joining forces changes the dynamic – for good or for bad. Ultimately, your success will likely be driven by the strength of your relationship with your new partner. A thoughtfully prepared joint venture agreement that addresses the various issues that may be encountered, along with an attention to the licensing and other requirements that the new venture will face, will only improve your chance to succeed.
If you have any questions regarding this article feel free to contact the author at as@salamiradmorrow.com.