Loss of Leverage or Increased Resources?
The Impact of California's New Cap on Withholdings in Public Works Projects
By: Guillermo M. Tello
Public entities, contractors, and subcontractors for years have enjoyed the flexibility California law provided parties to agree to the amounts to be withheld in retention of progress payments in contracts involving public works projects. Retention withholdings are very important, both in public and private projects, because retentions provide the owner, or public entity in public projects, as well as the prime contractor, who is obligated to pay the subcontractors, leverage to assure the prompt and satisfactory completion of projects. Commonly, owners, public entities, and prime contractors have negotiated to withhold ten percent (10%) in retention of progress payments and of the contract price until completion of the contracted work. This ten percent withheld from payment is thought to be sufficient incentive for contractors and subcontractor to satisfactorily complete the contracted work.
But a newly signed bill is set to impose limitations on the amounts that can be withheld from progress payments and the entire contract price of public works projects. SB 293 which takes effect on January 1, 2012, amends, repeals, and creates new statutes impacting public works projects. Of particular importance, two statutes impose restrictions on the amounts that can be withheld in all public works contracts entered on or after January 1, 2012. New California Public Contract Code section 7201 caps retention proceeds withheld from progress payments at five percent (5%) and section 10261, as amended, caps the amount that can be withheld of the contract price "until final completion and acceptance" of the work also at five percent (5%).
While this cap reduces the impact of the leverage public entities and prime contracts had to assure completion of projects, other payment and performance terms can be drafted to provide public entities and prime contractors additional control over the performance of the work and the completion of the project. Additionally, both sections 7201 and 10261 contain significant exceptions, for "substantially complex" projects and where the requisite "payment or performance" bonds are not furnished, that allow withholdings of greater than five percent (5%) in public works projects.
Contractors and subcontractors, however, welcome these changes. With this five percent (5%) cap, contractors and subcontractors can expect to see an increase in cash flow through progress payments. The increased cash flow may provide contractors and subcontractors the funds and resources necessary to assure they timely complete the work obligated to perform under the contract. However, contractors and subcontractors must still consider other contract terms that public entities and prime contractors are likely to utilize to compensate for the perceived lost leverage they had in withholding larger sums.
With such significant changes in California law, whether you are a public entity, a contractor, or subcontractor you should consult the experienced and knowledgeable attorneys of Rippetoe Law, P.C., before signing your next public works project contract. To contact us click here.