CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 456

Author:(Chiu, et al.)

As Amended Ver:August 30, 2019

Majority vote

SUMMARY:

Extends the sunset date from January 1, 2020 to January 1, 2027 of a claim resolution process that enables contractors to seek public agency review of claims that arise during public works projects.

The Senate Amendments:

Set the 2027 date for repeal of the claim resolution process instead of making it permanent.

COMMENTS:

This bill allows a current claim resolution process for prompt payments related to undisputed work to remain law until January 1, 2027. AB 626 (Chiu), Chapter 810, Statutes of 2016, establishes the claims resolution process for public works projects, but it is set to expire January 1, 2020.

Under the current process, contractors for public works projects can submit claims to public entities. Public entities must then provide a written response to claims within 45 days that details disputed and undisputed amounts. Further, it requires the payment of undisputed amounts and sets a process to resolve remaining disputes. Contractors can demand a meet and confer conference with the entity for remaining disputes. Items not resolved during the conference are submitted to nonbinding mediation.

While the claims process applies to both local and state public entities, it excluded the following state entities; Department of Water Resources, as to any project under its jurisdiction; California Department of Transportation, as to any project under its jurisdiction; the Department of Parks and Recreation, as to any project under its jurisdiction; the Department of Corrections and Rehabilitation, with respect to any project under its jurisdiction, as specified; the Military Department, as to any project under its jurisdiction; Department of General Services, as to all other projects; and the High-Speed Rail Authority. This bill, by changing the repeal date, will not alter which entities are and are not subject to the AB 626 process.

According to the Author:

This bill will "continue to ensure that public agencies are held accountable for paying contractors on time. Contractors who bid and perform the vital infrastructure work of our state should not have to worry about when or if they will get paid for work that a public agency requested and approved."

Arguments in Support:

Supporters have stated that the current claim resolution process, which would be extended by this bill, has led to fewer disputes, less litigation, and more timely payments to public works contractors.

Arguments in Opposition:

None on file.

FISCAL COMMENTS:

According to the Senate Appropriations Committee:

1. State agencies: Unknown costs, potentially in excess of tens of thousands of dollars, to non-exempt state agencies that engage in public works contracts for claims review and resolution if the requirement is extended. The claims resolution process would result in continued administrative costs to review, evaluate, and respond to claims within 45 days and for mandated mediation. (General Fund)
2. Local agencies: Unknown, potentially-significant continued costs to local agencies engaged in public works projects to the extent this process results in higher administrative costs than the processes that the local agencies would have used if the claims resolution process requirement lapsed. Local costs to comply with this process likely would be subject to reimbursement from the General Fund as a state-mandated local program, the extent of which would be determined by the Commission on State Mandates. (General Fund, local funds)
3. Interest: Additional unknown costs to state and local agencies for interest costs accrued on payments not paid within the prescribed timelines. (Various funds)

VOTES:

ASM ACCOUNTABILITY AND ADMINISTRATIVE REVIEW: 6-0-1

YES: Petrie-Norris, Patterson, Lackey, Medina, Quirk-Silva, Smith

ABS, ABST OR NV: Burke

ASM APPROPRIATIONS: 17-0-1

YES: Gonzalez, Bigelow, Bonta, Brough, Calderon, Carrillo, Chau, Diep, Eggman, Fong, Gabriel, McCarty, Maienschein, Obernolte, Petrie-Norris, Quirk, Robert Rivas

ABS, ABST OR NV: Bloom

ASSEMBLY FLOOR: 76-0-4

YES: Aguiar-Curry, Bauer-Kahan, Berman, Bigelow, Bloom, Boerner Horvath, Bonta, Brough, Burke, Calderon, Carrillo, Cervantes, Chau, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dahle, Daly, Diep, Eggman, Flora, Fong, Frazier, Friedman, Gabriel, Gallagher, Cristina Garcia, Gipson, Gloria, Gonzalez, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, O'Donnell, Obernolte, Patterson, Petrie-Norris, Quirk, Quirk‑Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Salas, Santiago, Smith, Mark Stone, Ting, Voepel, Waldron, Weber, Wicks, Wood, Rendon

ABS, ABST OR NV: Arambula, Chen, Eduardo Garcia, Gray

SENATE FLOOR: 40-0-0

YES: Allen, Archuleta, Atkins, Bates, Beall, Borgeas, Bradford, Caballero, Chang, Dahle, Dodd, Durazo, Galgiani, Glazer, Lena Gonzalez, Grove, Hertzberg, Hill, Hueso, Hurtado, Jackson, Jones, Leyva, McGuire, Mitchell, Monning, Moorlach, Morrell, Nielsen, Pan, Portantino, Roth, Rubio, Skinner, Stern, Stone, Umberg, Wieckowski, Wiener, Wilk

UPDATED:

VERSION: August 30, 2019

CONSULTANT: Scott Herbstman / A. & A.R. / (916) 319-3600 FN: 0001855

 THIRD READING  

Bill No: AB 456

Author: Chiu (D), Bonta (D) and Low (D), et al.

Amended: 8/30/19 in Senate

Vote: 21

SENATE JUDICIARY COMMITTEE: 9-0, 6/11/19

AYES: Jackson, Borgeas, Allen, Caballero, Jones, Monning, Stern, Umberg, Wieckowski

SENATE APPROPRIATIONS COMMITTEE: 7-0, 8/30/19

AYES: Portantino, Bates, Bradford, Durazo, Hill, Jones, Wieckowski

ASSEMBLY FLOOR: 76-0, 4/25/19 (Consent) - See last page for vote

SUBJECT: Public contracts: claim resolution

SOURCE: Author

DIGEST:

This bill extends the sunset date—from 2020 to 2027—of a claim resolution process that enables contractors to seek public agency review of claims that arise during public works projects.

ANALYSIS:

Existing law:

1. Establishes the Public Contract Code, which is the basis of contracts between most public entities in this state and their contractors and subcontractors. With regard to charter cities, this code applies in the absence of an express exemption or a city charter provision or ordinance that conflicts with the relevant provision of the code. (Pub. Contract Code § 1100.7.)^[1]
2. Defines “public works contract,” as an agreement for the erection, construction, alteration, repair, or improvement of any public structure, building, road, or other public improvement of any kind. (§ 1101.)
3. Establishes, for contracts entered into on or after January 1, 2017, a claim resolution process applicable to any claim by a contractor in connection with a public works project against a public entity. (§ 9204)
4. Defines “claim” as a separate demand by the contractor sent by registered mail or certified mail with return receipt requested, for one or more of the following:
   1. a time extension, including, without limitation, for relief from damages or penalties for delay assessed by a public entity under a public works contract;
   2. payment by the public entity of money or damages arising from work done by, or on behalf of, the contractor pursuant to the contract for a public work and payment that is not otherwise expressly provided or to which the claimant is not otherwise entitled; or
   3. payment of an amount that is disputed by the public entity. (§ 9204(c)(1).)
5. Defines “public entity” for these purposes as a state agency, department, office, division, bureau, board, or commission, the California State University, the University of California, a city, including a charter city, county, including a charter county, city and county, including a charter city and county, 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. Generally excludes from this definition the:
   1. Department of Water Resources;
   2. Department of Transportation;
   3. Department of Parks and Recreation;
   4. Department of Corrections and Rehabilitation;
   5. Military Department;
   6. Department of General Services; and
   7. High-Speed Rail Authority. (§ 9204(c)(3).)
6. Requires a public entity, upon receipt of a claim from a contractor in connection with a public works project, to conduct a reasonable review and within 45 days provide the claimant with a written statement identifying the disputed and undisputed portions of the claim. (§ 9204(d)(1)(C).) Undisputed portions of the claim must be paid within 60 days. (§ 9204(d)(1)(D).)
7. Provides that if the claimant disputes the public entity’s written response, or if the public entity fails to respond to a claim issued pursuant to this section within the time prescribed, the claimant may demand in writing an informal conference to meet and confer for settlement of the issues in dispute. Requires the public entity, upon receipt of a demand in writing sent by registered mail or certified mail, with return receipt requested, to schedule a meet-and-confer conference within 30 days for settlement of the dispute. (§ 9204(d)(2)(A).)
8. Requires, within 10 days following the meet-and-confer conference, the public entity, if the claim or any portion thereof remains in dispute, to provide the claimant a written statement identifying the portion of the claim that remains in dispute and the portion that is undisputed. Any disputed portion of the claim, as identified by the contractor in writing, must be submitted to nonbinding mediation, with the public entity and the claimant sharing the associated costs equally. (§ 9204(d)(2)(B).) Undisputed portions of the claim must be paid within 60 days. (Ibid.)
9. Specifies that, if mediation does not resolve the dispute, a public entity may require arbitration of the dispute under private arbitration or the Public Works Contract Arbitration Program. (§ 9204(d)(3).)
10. Imposes a seven percent annual interest rate on amounts not timely paid. (§ 9204(d)(4).)
11. Provides that if a subcontractor or a lower tier subcontractor lacks legal standing to assert a claim against a public entity because privity of contract does not exist, the contractor may present to the public entity a claim on behalf of the subcontractor or lower tier subcontractor. A subcontractor may request in writing, either on their own behalf or on behalf of a lower tier subcontractor, that the contractor present a claim for work that was performed by the subcontractor or by a lower tier subcontractor on behalf of the subcontractor. The subcontractor requesting that the claim be presented to the public entity must furnish reasonable documentation to support the claim. Within 45 days of receipt of this written request, the contractor must notify the subcontractor in writing as to whether the contractor presented the claim to the public entity and, if the original contractor did not present the claim, provide the subcontractor with a statement of the reasons for not having done so. (§ 9204(d)(5).)
12. Repeals section 9204 on January 1, 2020.

This bill extends to January 1, 2027, the repeal date applicable to Section 9204, thereby extending the operation of the claim resolution process described above.

Background

In public works projects, a public agency contracts with a general contractor who submits a bid to provide the materials and services for construction, alteration, demolition, installation, or repair work. At times, the cost of the materials and services is more than the general contractor’s bid due to changes in the project, which may result from inaccurate or incomplete project plans and specifications, additional demands by the public agency, or unexpected difficulties. In these cases, contractors generally seek reimbursement for the increased costs by submitting a claim to the public entity, which may lead to a dispute.

To facilitate the prompt resolution of such disputes, the Legislature enacted AB 626 (Chiu, Chapter 810, Statutes of 2016), which provides for a claim resolution process applicable to any claim by a contractor in connection with a public works project against a public entity. Public entities must then provide a written response to claims within 45 days that details disputed and undisputed amounts. AB 626 requires the payment of undisputed amounts and establishes a process to resolve lingering disputes, including a right for contractors to demand a meet-and-confer conference with the entity. Items not resolved during the conference are submitted to nonbinding mediation. AB 626 will sunset January 1, 2020.

This bill extends that sunset date to January 1, 2027.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee:

• State agencies: Unknown costs, potentially in excess of tens of thousands of dollars, to non-exempt state agencies that engage in public works contracts for claims review and resolution if the requirement is extended. The claims resolution process would result in continued administrative costs to review, evaluate, and respond to claims within 45 days and for mandated mediation. (General Fund)
• Local agencies: Unknown, potentially-significant continued costs to local agencies engaged in public works projects to the extent this process results in higher administrative costs than the processes that the local agencies would have used if the claims resolution process requirement lapsed. Local costs to comply with this process likely would be subject to reimbursement from the General Fund as a state-mandated local program, the extent of which would be determined by the Commission on State Mandates. (General Fund, local funds)
• Interest: Additional unknown costs to state and local agencies for interest costs accrued on payments not paid within the prescribed timelines. (Various funds)

SUPPORT: (Verified 8/30/19)

American Subcontractors Association of California

California Asian Pacific Islander Chamber of Commerce
California Chapters of the National Electrical Contractors Association
California Legislative Conference of Plumbing, Heating & Piping Industry

California State Association of Electrical Workers
California State Council of Laborers
California State Pipe Trades Council
International Union of Operating Engineers, California-Nevada Conference
Northern California Allied Trades

Southern California Contractors Association

State Building Trades and Construction Trades Council of California
United Contractors
Wall and Ceiling Alliance
Western States Council Sheet Metal
Western Wall & Ceiling Contractors Association

OPPOSITION: (Verified 8/30/19)

Department of Finance

ARGUMENTS IN SUPPORT: According to the author, this bill will “continue to ensure that public agencies are held accountable for paying contractors on time. Contractors who bid and perform the vital infrastructure work of our state should not have to worry about when or if they will get paid for work that a public agency requested and approved.”

This bill is supported by numerous labor organizations. Supporters state that the claims resolution process has led to fewer disputes, less litigation, and more timely payments to public works contractors. Supporters assert that timely payments benefit employees by ensuring that contractors continue to have the necessary resources to compensate the employees and to submit bids for subsequent projects. Finally, supporters contend that the claims resolution process protects taxpayers by reducing unnecessary costs and increasing efficiency.

ARGUMENTS IN OPPOSITION: The Department of Finance opposes the bill on the basis that it increases costs, as public entities must pay for half the cost of nonbinding mediation, which does not guarantee that disputes are resolved without litigation. The Department of Finance’s opposition letter does not discuss the potential savings of the lower overall rates of litigation that supporters assert the claim resolution process has caused.

ASSEMBLY FLOOR: 76-0, 4/25/19

AYES: Aguiar-Curry, Bauer-Kahan, Berman, Bigelow, Bloom, Boerner Horvath, Bonta, Brough, Burke, Calderon, Carrillo, Cervantes, Chau, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dahle, Daly, Diep, Eggman, Flora, Fong, Frazier, Friedman, Gabriel, Gallagher, Cristina Garcia, Gipson, Gloria, Gonzalez, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Petrie-Norris, Quirk, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Salas, Santiago, Smith, Mark Stone, Ting, Voepel, Waldron, Weber, Wicks, Wood, Rendon

NO VOTE RECORDED: Arambula, Chen, Eduardo Garcia, Gray

Prepared by: Josh Tosney / JUD. / (916) 651-4113

9/3/19 11:00:44

**** END ****

1. All further statutory references are to the Public Contract Code unless otherwise specified. ↑

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

AB 456 (Chiu) - Public contracts: claim resolution

Bill Summary:

AB 456 would delete the sunset date of a claims resolution process that enables contractors to seek public agency review of claims that arise during public works projects of specified public entities.

*********** ANALYSIS ADDENDUM – SUSPENSE FILE ***********

The following information is revised to reflect amendments

adopted by the committee on August 30, 2019

Fiscal Impact:

• State agencies: Unknown costs, potentially in excess of tens of thousands of dollars, to non-exempt state agencies that engage in public works contracts for claims review and resolution if the requirement is extended. The claims resolution process would result in continued administrative costs to review, evaluate, and respond to claims within 45 days and for mandated mediation. (General Fund)
• Local agencies: Unknown, potentially-significant continued costs to local agencies engaged in public works projects to the extent this process results in higher administrative costs than the processes that the local agencies would have used if the claims resolution process requirement lapsed. Local costs to comply with this process likely would be subject to reimbursement from the General Fund as a state-mandated local program, the extent of which would be determined by the Commission on State Mandates. (General Fund, local funds)
• Interest: Additional unknown costs to state and local agencies for interest costs accrued on payments not paid within the prescribed timelines. (Various funds)

Author Amendments:

Insert a sunset date of January 1, 2027.

-- END --

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

AB 456 (Chiu) - Public contracts: claim resolution

Bill Summary:

AB 456 would delete the sunset date of a claims resolution process that enables contractors to seek public agency review of claims that arise during public works projects of specified public entities.

Fiscal Impact:

• State agencies: Unknown costs, potentially in excess of tens of thousands of dollars, to non-exempt state agencies that engage in public works contracts for claims review and resolution if the requirement is extended. The claims resolution process would result in continued administrative costs to review, evaluate, and respond to claims within 45 days and for mandated mediation. (General Fund)
• Local agencies: Unknown, potentially-significant continued costs to local agencies engaged in public works projects to the extent this process results in higher administrative costs than the processes that the local agencies would have used if the claims resolution process requirement lapsed. Local costs to comply with this process likely would be subject to reimbursement from the General Fund as a state-mandated local program, the extent of which would be determined by the Commission on State Mandates. (General Fund, local funds)
• Interest: Additional unknown costs to state and local agencies for interest costs accrued on payments not paid within the prescribed timelines. (Various funds)

Background:

Existing law provides for a claim resolution process applicable to any claim by a contractor in connection with a public works project, the contract for which was entered into on or after January 1, 2017, against specified public entity. After the receipt of claims, the public entity must provide a written response to claims within 45 days that details disputed and undisputed amounts. The public entity must pay undisputed amounts. There is a process to resolve remaining disputes. Specifically, contractors may demand a meet-and-confer conference with the entity for remaining disputes. Items not resolved during the conference are submitted to nonbinding mediation. Finally, if a subcontractor or a lower-tier subcontractor lacks legal standing to assert a claim against a public entity because privity of contract does not exist, the contractor may present to the public entity a claim on behalf of the subcontractor or lower-tier subcontractor. Amounts that are not paid in a timely manner as required by existing law bear interest at 7 percent per annum.

Proposed Law:

This bill would delete the January 1, 2020 sunset date for the claim resolution process for specified public works projects.

Related Legislation:

AB 626 (Chiu, Ch. 810, Stats. 2016) created the provisions for which this measure seeks to eliminate the sunset date. AB 1347 (Chiu, 2015) was similar to AB 626 but was vetoed by the Governor.

AB 2471 (Frazier, 2014) would have required state and local public entities engaged in a public works contract awarded to the lowest bidder to promptly issue change orders when extra work is required of the contractor or subcontractor. AB 2471 failed passage in this Committee without a hearing.

AB 2096 (Miller, 2010) and AB 541 (Duvall, 2009) would have allowed a public agency and a contractor to mutually agree to resolve a claim through independent arbitration. Both measures failed passage in the Assembly Committee on Judiciary without a hearing.

AB 216 (Beall, 2009) would have reformed pre-litigation claims resolution procedures for local public works projects. AB 216 was held on the Suspense File of the Assembly Committee on Appropriations.

SB 1642 (Yee, 2008) would have established alternative dispute resolution procedures for local public works projects costing over $50,000. SB 1642 was held under submission in the Senate Appropriations Committee

Staff Comments:

By requiring state agencies that are not otherwise exempted to continue to adhere to the claims resolution process that is set to expire at the end of this year, this bill could result in significant personnel costs for evaluation, response, coordination, and oversight activities related to submitted claims requiring action within the prescribed timeframes. Although the bill exempts specified state agencies involved with numerous public works projects and/or large-scale projects (e.g., the Department of Water Resources, CalTrans, the Department of General Services, and the High Speed Rail Authority), the claims resolution process requirements still would apply to all other public entities not specifically exempted. This includes the University of California and the California State University. The number of claims potentially submitted by contractors for public works projects entered into by non-exempted public entities cannot be known with certainty, and as a result, the costs are unknown, but potentially significant.

Additionally, by requiring local agencies to continue to adhere to the claims resolution process, this bill creates a state-mandated local program, potentially resulting in major state-reimbursable costs from the General Fund to local agencies engaged in public works projects. While the magnitude of costs to local agencies cannot be estimated with certainty, given the volume of local public works projects and claims subject to this resolution process, costs are potentially substantial.

-- END --

SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2019-2020 Regular Session

Bill No: AB 456 (Author:Chiu)

Version: February 11, 2019

Hearing Date: June 11, 2019

Fiscal: Yes

Urgency: No

Consultant: JT

SUBJECT

Public contracts: claim resolution

DIGEST

This bill deletes the sunset date of a claims resolution process that enables contractors to seek public agency review of claims that arise during public works projects.

EXECUTIVE SUMMARY

In public works projects, a public agency contracts with a general contractor who submits a bid or estimated cost to provide the materials and services for the construction, alteration, demolition, installation, or repair work. At times, the cost of the materials and services is more than the general contractor’s bid due to changes in the project, which may result from inaccurate or incomplete project plans and specifications, additional demands by the public agency, or unexpected difficulties. In these cases, contractors generally seek reimbursement for the increased costs by submitting a claim to the public entity, which may lead to a dispute.

To facilitate the prompt resolution of such disputes, the Legislature enacted AB 626 (Chiu, Ch. 810, Stats. 2016), which provides for a claim resolution process applicable to any claim by a contractor in connection with a public works project against a public entity. Public entities must then provide a written response to claims within 45 days that details disputed and undisputed amounts. AB 626 requires the payment of undisputed amounts and establishes a process to resolve lingering disputes, including a right for contractors to demand a meet-and-confer conference with the entity. Items not resolved during the conference are submitted to nonbinding mediation. AB 626 will sunset January 1, 2020.

This bill would eliminate that sunset date, thereby extending AB 626’s claims resolution process indefinitely. The bill is supported by numerous labor groups and has no known opposition.

PROPOSED CHANGES TO THE LAW

Existing law:

1. Establishes the Public Contract Code, which is the basis of contracts between most public entities in this state and their contractors and subcontractors. With regard to charter cities, this code applies in the absence of an express exemption or a city charter provision or ordinance that conflicts with the relevant provision of the code. (Pub. Contract Code § 1100.7.)^[1]
2. Defines “public works contract,” as an agreement for the erection, construction, alteration, repair, or improvement of any public structure, building, road, or other public improvement of any kind. (§ 1101.)
3. Establishes, for contracts entered into on or after January 1, 2017, a claim resolution process applicable to any claim by a contractor in connection with a public works project against a public entity. (§ 9204)
4. Defines “claim” as a separate demand by the contractor sent by registered mail or certified mail with return receipt requested, for one or more of the following:
   1. a time extension, including, without limitation, for relief from damages or penalties for delay assessed by a public entity under a public works contract;
   2. payment by the public entity of money or damages arising from work done by, or on behalf of, the contractor pursuant to the contract for a public work and payment that is not otherwise expressly provided or to which the claimant is not otherwise entitled; or
   3. payment of an amount that is disputed by the public entity. (§ 9204(c)(1).)
5. Defines “public entity” for these purposes as a state agency, department, office, division, bureau, board, or commission, the California State University, the University of California, a city, including a charter city, county, including a charter county, city and county, including a charter city and county, 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. Generally excludes from this definition the:
   1. Department of Water Resources;
   2. Department of Transportation;
   3. Department of Parks and Recreation;
   4. Department of Corrections and Rehabilitation;
   5. Military Department;
   6. Department of General Services; and
   7. High-Speed Rail Authority. (§ 9204(c)(3).)
6. Requires a public entity, upon receipt of a claim from a contractor in connection with a public works project, to conduct a reasonable review and within 45 days provide the claimant with a written statement identifying the disputed and undisputed portions of the claim. (§ 9204(d)(1)(C).) Undisputed portions of the claim must be paid within 60 days. (§ 9204(d)(1)(D).)
7. Provides that if the claimant disputes the public entity’s written response, or if the public entity fails to respond to a claim issued pursuant to this section within the time prescribed, the claimant may demand in writing an informal conference to meet and confer for settlement of the issues in dispute. Requires the public entity, upon receipt of a demand in writing sent by registered mail or certified mail, with return receipt requested, to schedule a meet-and-confer conference within 30 days for settlement of the dispute. (§ 9204(d)(2)(A).)
8. Within 10 days following the meet-and-confer conference, requires the public entity, if the claim or any portion thereof remains in dispute, to provide the claimant a written statement identifying the portion of the claim that remains in dispute and the portion that is undisputed. Any disputed portion of the claim, as identified by the contractor in writing, must be submitted to nonbinding mediation, with the public entity and the claimant sharing the associated costs equally. (§ 9204(d)(2)(B).) Undisputed portions of the claim must be paid within 60 days. (Ibid.)
9. If mediation does not resolve the dispute, specifies that a public entity may require arbitration of the dispute under private arbitration or the Public Works Contract Arbitration Program. (§ 9204(d)(3).)
10. Imposes a 7 percent annual interest rate on amounts not timely paid. (§ 9204(d)(4).)
11. Provides that if a subcontractor or a lower tier subcontractor lacks legal standing to assert a claim against a public entity because privity of contract does not exist, the contractor may present to the public entity a claim on behalf of the subcontractor or lower tier subcontractor. A subcontractor may request in writing, either on their own behalf or on behalf of a lower tier subcontractor, that the contractor present a claim for work that was performed by the subcontractor or by a lower tier subcontractor on behalf of the subcontractor. The subcontractor requesting that the claim be presented to the public entity must furnish reasonable documentation to support the claim. Within 45 days of receipt of this written request, the contractor must notify the subcontractor in writing as to whether the contractor presented the claim to the public entity and, if the original contractor did not present the claim, provide the subcontractor with a statement of the reasons for not having done so. (§ 9204(d)(5).)
12. Repeals section 9204 on January 1, 2020.

This bill removes the January 1, 2020, repeal date applicable to section 9204, thereby making the claim resolution process described above operative indefinitely.

COMMENTS

1. Background

In general, “public works” refers to the construction, alteration, demolition, installation, or repair work (including maintenance) of any public structure, building, road, or other improvement done under contract and paid with public funds, or if private funds are used, more than 50 percent of the square footage is leased to a public entity. Several laws regulate various aspects of public works projects to safeguard the public’s interest. Public works projects do not include those done by a public agency with its own employees.

In public works projects, a public agency contracts with a general contractor who has submitted a bid or estimated cost to provide the materials and services for the construction, alteration, demolition, installation, or repair work. At times, the cost of the materials and services is more than the general contractor’s bid due to changes in the project, which may result from inaccurate or incomplete project plans and specifications, additional demands by the public agency, or unexpected difficulties. These increases in costs may be submitted to the public agency for payment.

Before AB 626 (Chiu, Ch. 810, Stats. 2016), a general contractor with cost overruns for which the contractor was not responsible had no recourse to resolve a claim dispute outside of arbitration or a civil action. Additionally, a subcontractor that performed additional services or provided materials outside the scope of the original contract, but necessary to complete the project, could not seek payment from the public agency for lack of contractual privity. Delays in payment for the extra work provided by the contractor or subcontractor often placed the contractor or subcontractor at financial risk and jeopardized the project. These recurrent issues occasionally culminated in costly litigation that drained the resources of the public agency, contractors, and subcontractors.

2. Removes the sunset date on a claim resolution process applicable to certain public works contracts

In 2016, following multiple failed attempts to address pre-litigation claim disputes, Governor Brown signed AB 626 into law. AB 626 added section 9204, which provides for a claim resolution process applicable to any claim by a contractor in connection with a public works project against a public entity. Public entities must then provide a written response to claims within 45 days that details disputed and undisputed amounts. Section 9204 requires the payment of undisputed amounts and sets a process to resolve remaining disputes. Contractors can demand a meet-and-confer conference with the entity for remaining disputes. Items not resolved during the conference are submitted to nonbinding mediation. Finally, section 9204 provides that if a subcontractor or a lower tier subcontractor lacks legal standing to assert a claim against a public entity because privity of contract does not exist, the contractor may present to the public entity a claim on behalf of the subcontractor or lower tier subcontractor.

AB 626 was similar to AB 1347 (Chiu, 2015), which was vetoed by Governor Brown. Unlike AB 626, AB 1347 received some opposition from public entities based on various concerns, mostly regarding costs. In his veto message, Governor Brown stated the following:

[…] Contractors who perform work for public agencies should be paid promptly. Swift resolution of payment disputes is in the best interest of contractors, workers, and the public agencies that are charged with efficiently managing taxpayer funds. I'm not convinced, however, that the procedures contemplated by this bill are an improvement over current law.

I am committed, however, to ensuring timely payment for work ordered by public agencies. In the interest of furthering that goal I am directing my departments to immediately work with industry partners and the proponents of this bill on ways of improving our prompt payment policies.

However, Governor Brown signed AB 626, which differed from AB 1347 in that it excluded more California state agencies. Section 9204(c)(3)’s definition of “public entity” excludes major state entities with numerous public works contracts, large-scale projects, or both. State agencies not subject to the current claims process include: the Department of Water Resources, the California Department of Transportation, the Department of Parks and Recreation, the Department of Corrections and Rehabilitation, the Military Department, the Department of General Services, and the High-Speed Rail Authority. In effect, the current process applies to the University of California, the California State University, and local entities.

This Committee passed both bills unanimously. The Committee’s analysis of AB 626 argued that it would provide a simplified, cost-effective claims resolution procedure to resolve contractor claims before arbitration or civil action. Additionally, the analysis argued that AB 626 would provide a clear process for a subcontractor to submit claims through a general contractor in order to provide the subcontractor with information as to whether the general contractor has rejected the request to submit the subcontractor’s claim to the public agency.

This bill would eliminate section 9204’s sunset date of January 1, 2020, thereby continuing the process established by AB 626. The bill does not make any substantive changes to the scope or operation of section 9204.

3. Arguments in support

According to the author, this bill will “continue to ensure that public agencies are held accountable for paying contractors on time. Contractors who bid and perform the vital infrastructure work of our state should not have to worry about when or if they will get paid for work that a public agency requested and approved.”

This bill is supported by numerous labor organizations. Supporters state that the claims resolution process has led to fewer disputes, less litigation, and more timely payments to public works contractors. Supporters assert that timely payments benefit employees by ensuring that contractors continue to have the necessary resources to compensate the employees and to submit bids for subsequent projects. Finally, supporters contend that the claims resolution process protects taxpayers by reducing unnecessary costs and increasing efficiency.

SUPPORT

American Subcontractors Association of California

California Asian Pacific Islander Chamber of Commerce
California Chapters of the National Electrical Contractors Association
California Legislative Conference of Plumbing, Heating & Piping Industry

California State Association of Electrical Workers
California State Council of Laborers
California State Pipe Trades Council
International Union of Operating Engineers, California-Nevada Conference
Northern California Allied Trades

Southern California Contractors Association

State Building Trades and Construction Trades Council of California
United Contractors
Wall and Ceiling Alliance
Western States Council Sheet Metal
Western Wall & Ceiling Contractors Association

OPPOSITION

None known

RELATED LEGISLATION

Pending Legislation: None known

Prior Legislation: See Comment 2.

AB 2471 (Frazier, 2014) would have required state and local public entities engaged in a public works contract awarded to the lowest bidder to promptly issue change orders when extra work is required of the contractor or subcontractor. AB 2471 died in the Senate Appropriations Committee without a hearing.

AB 2096 (Miller, 2010) would have allowed a public agency and a contractor to mutually agree to resolve a claim through independent arbitration. AB 2096 died in the Assembly Judiciary Committee without a hearing.

AB 541 (Duvall, 2009) was substantially similar to AB 2096 and died in the Assembly Judiciary Committee without a hearing.

AB 216 (Beall, 2009) would have reformed pre-litigation claims resolution procedures for local public works projects. AB 216 was held under submission in the Assembly Appropriations Committee.

SB 1642 (Yee, 2008) would have established alternative dispute resolution procedures for local public works projects costing over $50,000. SB 1642 was held under submission in the Senate Appropriations Committee.

PRIOR VOTES:

Assembly Floor (Ayes 76, Noes 0)

Assembly Appropriations Committee (Ayes 17, Noes 0)

Assembly Accountability and Administrative Review Committee (Ayes 6, Noes 0)

**************

1. All further statutory references are to the Public Contract Code unless otherwise specified. ↑

Date of Hearing: April 10, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 456

Author:(Chiu, et al.) – As Introduced Ver:February 11, 2019

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill deletes the January 1, 2020, sunset date applicable to a current claim resolution process for prompt payments related to undisputed work, thereby making the process permanent. This process was established by AB 626 (Chiu), Chapter 810, Statutes of 2016, and applies to certain public works contracts entered into on or after January 1, 2017.

FISCAL EFFECT:

Negligible costs to affected entities to eliminate the sunset. Potential cost savings to the extent the program has successfully decreased construction delays, reduced costs on public works projects and reduced litigation.

COMMENTS:

1. Purpose. This bill seeks to continue a claims resolution process that supporters assert has led to fewer disputes, less litigation and more timely payments to public works contractors.
2. Background. Under existing law, contractors for public works projects can submit claims to public entities. Public entities must then provide a written response to claims within 45 days that details disputed and undisputed amounts. Existing law requires the payment of undisputed amounts and sets a process to resolve remaining disputes. Contractors can demand a meet-and-confer conference with the entity for remaining disputes. Items not resolved during the conference are submitted to nonbinding mediation.

The current claims process this bill is seeking to make permanent applies to both local and state public entities generally, but excludes major state entities with numerous public works contracts, large-scale projects or both. State agencies not subject to the current claims process include: the Department of Water Resources, the California Department of Transportation, the Department of Parks and Recreation, the Department of Corrections and Rehabilitation, the Military Department, the Department of General Services, and the High-Speed Rail Authority. In effect, the current process applies to the University of California, the California State University and local entities.

Analysis Prepared by: Jennifer Swenson / APPR. / (916) 319-2081

Date of Hearing: March 27, 2019

ASSEMBLY COMMITTEE ON ACCOUNTABILITY AND ADMINISTRATIVE REVIEW

Cottie Petrie-Norris, Chair

ABPCA Bill Id:AB 456 (

Author:Chiu) – As Introduced Ver:February 11, 2019

SUBJECT: Public contracts: claim resolution

SUMMARY: Makes a claim resolution process for public works projects in existing law permanent by removing the January 1, 2020 repeal date.

EXISTING LAW: Establishes, with specified exceptions, a claim resolution process for public works projects with local and state public entities.

FISCAL EFFECT: Unknown

COMMENTS: This bill allows a current claim resolution process for prompt payments related to undisputed work to remain law. AB 626 (Chiu), Chapter 810, Statutes of 2016, establishes the claims resolution process for public works projects, but it is set to expire January 1, 2020.

Under the current process, contractors for public works projects can submit claims to public entities. Public entities must then provide a written response to claims within 45 days that details disputed and undisputed amounts. Further, it requires the payment of undisputed amounts and sets a process to resolve remaining disputes. Contractors can demand a meet and confer conference with the entity for remaining disputes. Items not resolved during the conference are submitted to nonbinding mediation.

According to the author, this bill will “continue to ensure that public agencies are held accountable for paying contractors on time. Contractors who bid and perform the vital infrastructure work of our state should not have to worry about when or if they will get paid for work that a public agency requested and approved.”

While the claims process applies to both local and state public entities, it excluded the following state entities; Department of Water Resources, as to any project under its jurisdiction; California Department of Transportation, as to any project under its jurisdiction; the Department of Parks and Recreation, as to any project under its jurisdiction; the Department of Corrections and Rehabilitation, with respect to any project under its jurisdiction, as specified; the Military Department, as to any project under its jurisdiction; Department of General Services, as to all other projects; and the High-Speed Rail Authority. This bill, by removing the repeal date, will not alter which entities are and are not subject to the AB 626 process.

Supporters have stated that the AB 626 process has led to fewer disputes, less litigation, and more timely payments to public works contractors.

REGISTERED SUPPORT / OPPOSITION:

Support

American Subcontractors Association-California
CalAsian Chamber of Commerce
California Chapters of the National Electrical Contractors Association
California Legislative Conference of Plumbing, Heating & Piping Industry
California State Association of Electrical Workers
California State Council of Laborers
California State Pipe Trades Council
International Union of Operating Engineers, Cal-Nevada Conference
Northern California Allied Trades
United Contractors
Wall and Ceiling Alliance
Western States Council Sheet Metal
Western Wall & Ceiling Contractors Association

Opposition

None on file

Analysis Prepared by: Scott Herbstman / A. & A.R. / (916) 319-3600