LEGAL NOTICE:
California Assembly Bill AB 2173
Limits Public Works Project Retention Amounts Indefinitely
By: Joseph M. Sweeney, Esq., Christopher J. Olson, Esq., Scott A. Mangum, Esq.,
William M. Kaufman, Esq. and M. Jonathan Robb, Jr., Esq.
In 2012, retention proceeds became the subject of new law when California Governor Jerry Brown ratified Senate Bill (“SB”) 293, amending Public Contract Code section 7201. Senate Bill 293 restricts retention proceeds for public works construction to five percent (5%). This summer, Governor Gavin Newsom announced he signed Assembly Bill 2173 into law, which places the 5% public works retention cap policy into California law for perpetuity. The retention cap was set to expire at the end of 2023 until AB 2173 was enacted.
Retention proceeds are often used on progress payments to ensure that projects are completed in a timely and satisfactory manner. Since most costs in a public works projects are incurred in the beginning of the project, the retention percentage helps ensure that the contractor does not abandon the project in an unfinished state but completes the project to acquire the retained funds.
Senate Bill 293’s reduction in retention cap had a significant effect on the leverage public entities had to ensure completion of public works construction contracts and AB 2173 makes this effect permanent. Because public entities are required to accept the lowest bidder for public works contracts, the retention cap is the main tool that public entities have to ensure that contractors are willing to complete their projects. Still, the retention rate is subject to some exceptions as specified by Public Contracts Code section 7201(b)(4). The retention rate may only exceed the specified five percent (5%) where before putting a project out on bid: (1) the governing board of the agency approves a finding during a regular and properly noticed governing board meeting that the proposed project is “substantially complex” and requires a retention amount greater than 5%; and (2) the public entity includes both the finding and the designated retention amount set by the governing board during meeting in the bid documents.
Now is a good time to review your form contracts, especially terms like retention percentages, and your insurance. Are your contracts up to date and do they contain terms and conditions (including indemnity, scope of work and payment provisions) that adequately protect your business and serve your specific needs? Moreover, do you have adequate insurance to protect your company when something inevitably goes wrong—including coverage for your subcontractors’ work (if applicable)? What exclusions and exemptions does your insurance policy contain? Have appropriate additional-insured endorsements been issued for particular projects and, if so, does that coverage continue or terminate when the subcontractor (or contractor) completes its work? Do you have an adequate attorney’s fees clause if it becomes necessary to pursue legal action in the event you are not paid?
All of these important questions must be addressed in advance of contracting to mitigate against potential catastrophic results. Contractors are encouraged to have their contracts reviewed by counsel, including to make sure to comply with changes to the Public Contracts Code!
For more information, or if you you have specific questions, please contact Joseph M. Sweeney, Esq., Christopher J. Olson, Esq., Scott A. Mangum, Esq., William M. Kaufman, Esq. and M. Jonathan Robb, Jr., Esq.