Salamirad Morrow | Attorneys at Law

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

Released on: September 17, 2014 | Category: News | Author: Ali Salamirad

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. 

 


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

Released on: September 17, 2014 | Category: News

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. 

 


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


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