New ASA-Supported California Law Assures Payment of Subcontractors

Thu September 05, 2013 - West Edition
CEG



A new California law helps assure that construction subcontractors, specialty trade contractors, and suppliers will be paid for work they perform and services they provide on construction components of certain infrastructure projects financed through public-private partnerships.

On Aug. 13, California Gov. Jerry Brown (D) signed legislation (AB 164), supported by the American Subcontractors Association, amending the government code related to infrastructure financing that authorizes local government agencies to use P3s to design, finance, and maintain a variety of fee-producing infrastructure facilities. The new law (Chapter 94) extends the California “Little Miller Act” to these P3s by requiring the inclusion of “payment bonds to secure the payment of claims of laborers, mechanics, and materials suppliers employed on the work under contract” and “performance bonds as security to ensure the completion of the construction of the facility.”

The California “Little Miller Act” requires the prime contractor to furnish surety bonds on public construction projects in excess of $25,000 in the amount of 100 percent of the contract to assure that the project will be completed, protecting taxpayer dollars, and that subcontractors and suppliers, many of which are small businesses, will be paid.

ASA of California initiated the legislation, which was supported by other major construction associations in the state. “More than 268,000 licensed subcontractors will benefit from this payment protection, especially because P3 projects have become more popular since public coffers have suffered,” said Daniel F. McLennon, Esq., McLennon Law Corp., San Francisco, Calif. McLennon, chair of ASA of California’s Government Relations Committee, along with Scott Holbrook, Esq., Crawford & Bangs, Covina, Calif., worked on the bill’s language.

Depending on how a construction project funded by both public and private sources is structured, the project may be exempt from both payment bond requirements and mechanic’s liens, leaving subcontractors and suppliers without adequate payment assurances.

On July 16, ASA urged Gov. Brown to sign the legislation. “Lack of payment assurances shifts very substantial risks to subcontractors and suppliers working on a P3 project,” wrote ASA Chief Advocacy Officer E. Colette Nelson. “Typically, subcontractors extend large amounts of credit before submitting an invoice to the project’s prime contractor. They will have paid their workers and suppliers. They may even have paid estimated taxes before payment is forthcoming for work properly performed. Taxpayers ultimately bear the costs of increased risk of nonpayment to construction subcontractors and suppliers.”

Increasingly, California and other states are funding construction projects for public use through public-private partnerships. Typically, the public entity will provide the land and authorize the private entity to design, build, and frequently operate the resulting public work. In trying to maximize the incentives for the participation of private investment in P3 projects, state and local governments try to minimize government red tape. The zeal to reduce red tape has damaging consequences, however, when it eliminates or omits deeply justified requirements related to public procurement, such as the statutory payment protections for work performed by subcontractors and suppliers.

“With this new California law, as well as other state P3 laws enacted during 2013, construction subcontractors have turned the tide against those attempting to use P3s as a tool to erode subcontractor payment rights,” Nelson said.