In one of the most challenging economic environments in decades, construction subcontractors continue to secure major public policy victories at the state level, according to The ASA Report: The Policy Environment in the States. Released by the American Subcontractors Association, this year’s report shows that three states — Kansas, California and New York — made strides significant enough to earn a ’D’ or better and join New Mexico as the only states with passing grades for supporting/protecting subcontractor rights.
“The 2009 ASA Report shows that complex policy changes can happen when ASA members speak with one voice, regardless of how tough the business environment might be,” said 2009-10 ASA President Darlene East, Holes Incorporated, Houston, Texas. “ASA urges construction subcontractors to use the results of The ASA Report to help policymakers understand why reforms are needed to implement positive change for the construction industry.”
Kansas earned the points needed for a passing grade for enactment of the landmark Controlled Insurance Programs Act (H.B. 2214), which was signed into law by Gov. Mark Parkinson on May 21, 2009. This law makes Kansas the first state to comprehensively regulate the terms and conditions of CIPs, also known as wrap-up insurance. Enactment was a major accomplishment for ASA — Greater Kansas City.
ASA of California worked hard to win enactment of California’s wrap-up insurance law (A.B. 2738), which requires owners, builders and contractors that obtain a wrap-up insurance policy to disclose the terms of the program to contractors and subcontractors required to enroll in the wrap-up program. The measure was signed into law by Gov. Arnold Schwarzenegger on Sept. 27, 2008, pushing California’s grade from an “F” to a “D.”
And in New York, the state’s legislature passed A.B. 6493, helping the state to earn a passing grade this year as well. This reform of the state’s prompt payment law eliminated a loophole that allowed parties to a private construction contract to negotiate payment terms other than those outlined by the state’s prompt pay law. The measure also decreases by half the dollar thresholds that trigger the payment deadlines, affirms contractors’ and subcontractors’ right to suspend work with cost reimbursement if they are not paid, and establishes procedures for arbitration of payment claims. Gov. David Paterson signed the bill into law on Sept. 9, 2009.
Other states experienced changes in their overall scores, but not grades, due to legislative/judicial activity, including Arkansas, New Hampshire and North Dakota. Arkansas adopted new limits on retainage and revised its mechanic’s lien law. New Hampshire enacted a form of bid listing, and North Dakota reformed its mechanic’s lien law.
ASA’s campaign warns subcontractors of weaknesses in their state laws, provides advocacy information to help change laws, and educates subcontractors about the need to remain vigilant when negotiating contracts in a harsh public policy environment.
ASA’s report scores and grades each state in seven policy areas and uses the results to calculate an overall score, grade and rank for each state. Taking into account both laws and judicial decisions, the report scores: (1) Prompt payment protections; (2) Treatment of pay-if-paid clauses; (3) Mechanic’s lien protections; (4) Payment bond protections; (5) Retainage limitations; (6) Anti-indemnity protections, including limits on “additional insured” endorsements; and (7) Anti-“bid shopping” measures.
In this year’s report, ASA added an “extra credit” course that evaluates how well states regulate CIPs. This extra credit course rewarded states that have taken the initiative to regulate these non-standard insurance programs, which can have hidden risks for subcontractors that participate in them. The scoring included policies pertaining to private work and to public work. States with comprehensive regulations that protect subcontractors’ rights in wrap-ups and establish requirements for program components and sponsors earned five extra credit points. ASA awarded three points to those states that set basic requirements for wrap-up programs, such as minimum project size, maximum deductibles or disclosure of program terms.
The Arkansas Legislature passed H.B. 1594, which clarifies subcontractor and supplier lien rights and stipulates that the prevailing party in a mechanic’s lien suit is entitled to attorneys’ fees and other legal costs. The measure, signed into law by Gov. Mike Beebe on March 19, 2009, increased Arkansas’s score in the mechanic’s lien course from 59 to 61.
North Dakota adopted S.B. 2250, which guarantees that any person that improves a property, “whether under contract with the owner of such real estate or under contract with any agent, trustee, contractor, or subcontractor of the owner” is entitled to a construction lien, and must only give notice to the owner before filing the lien. Gov. John Hoeven signed the bill into law on April 28, 2009. The state’s score in this course increased from 38 to 51.
South Carolina Gov. Mark Sanford signed a new law on June 2, 2009, that requires lien claimants to be licensed or registered as required by law. H. 3187 also includes a provision that limits the time lien claimants have to file perfecting lawsuits to six months. The measure lowers South Carolina’s mechanic’s lien score from 44 to 42.
Five states change their mechanic’s lien laws without triggering a change in score. Illinois passed H.B. 236, which stipulates that contractors on a single-family residence must give notice 10 days before recording a lien. Montana, Colorado, Tennessee and Pennsylvania all changed procedures for lien waivers or releases.
H.B. 326 in Montana clarifies that all lien releases must include the signature of the filer before they may be recorded by the county, closing a potentially dangerous loophole. In Colorado, S.B. 137 makes it a class 1 misdemeanor to sign a lien waiver for a construction loan and then knowingly fail to pay. In Tennessee, soliciting someone to sign a contract containing a lien waiver will result in the solicitor getting its license revoked and fee reimbursement for the solicited party due to S.B. 1417. In Pennsylvania, S.B. 563 removed a provision in the state’s residential mechanic’s lien law that prohibited lien waivers on projects valued at more than $1 million.
The new law also expands the definition of residential construction to include land development and structures “not more than 3 stories in height” built for residential purposes.
New Hampshire enacted S.B. 78, which requires general contractors to disclose to agencies and institutions of higher education the subcontractors hired to complete work on a state project “as soon as practicable” after award of the contract. The measure, signed into law by Gov. John Lynch on July 16, 2009, earned New Hampshire 50 percent in ASA’s anti-“bid shopping” course. Since disclosure is not required until after contract award, the law does not fully deter bid shopping and bid peddling.
In Ohio, a decision by the 10th District Court of Appeals should discourage bid shopping, even though it did not change Ohio’s scoring for this policy area. In the case Complete General Construction Co. v. Kard Welding Inc., dba Kard Bridge Products, the court ruled that Complete General did not actually accept subcontractor Kard’s “firm for 30 days” low bid because the general contractor continued to seek new bids after informing Kard that its bid was “accepted.”
The Arkansas Legislature passed S.B. 302, which limits retainage on public construction projects to 5 percent when a contractor secures payment and performance bonds. The previous law limited retainage to 10 percent for the first half of the project and 0 percent thereafter. Signed into law by Gov. Mike Beebe on Feb. 19, 2009, the law increases Arkansas’s retainage limitation score one point to 17.
Ohio’s H.B. 1 increased retainage on certain minority business enterprise contracts in a misguided attempt to protect the state when surety bond requirements are waived. Instead of payment and performance bonds, the state’s director of development will be able to secure performance with retainage of 15 percent on projects more than $50,000 or 12 percent for those valued less than $50,000. The change resulted in a three-point drop to 17 from the 2008 score of 20 in this policy area.
The Minnesota and Oregon legislatures adopted changes to the states’ retainage laws that did not impact their scores. Minnesota’s H.F. 1056 removed a provision that exempted residential projects from the state’s 5 percent retainage cap. Oregon enacted H.B. 2955, which specified additional alternate forms of security that can be accepted by the state in lieu of retainage. The state now accepts state bonds and irrevocable letters of credit in addition to federal bonds and surety bonds.
The Minnesota, Montana and Washington legislatures all passed modifications to prompt pay laws that did not result in score changes. Minnesota enacted H.F. 1056, which requires residential projects to follow the state’s prompt payment act. Montana shortened the deadline for owner payment to contractors by three days, and removed a provision stating that acceptance of a progress payment does not release a claim for interest on the payment. With the passage of Washington’s H.B. 1195, state agencies and municipalities are now required to approve change orders for undisputed additional work within 30 days of substantial completion or else pay the contractor interest at a rate of 1 percent per month.
The Ohio budget for fiscal year 2010, H.B. 1, included a provision that allows the state’s director of development to waive the bonding for the first five public projects that a minority contractor is awarded when the firm cannot obtain required payment and performance bonds. As the contractor completes projects without incident, the threshold for projects that qualify for the waiver increases from $25,000 to $600,000 on the fifth project. Gov. Ted Strickland signed the measure into law on July 17, 2009. Since the bill eroded subcontractor payment protections on some contracts, Ohio’s score in ASA’s payment bond course dropped from 68 to 66.
For more information, visit www.asaonline.com.