Changes to the Law in 2012: Prompt Payments to Subcontractors & Public Works Retention

This is the first in a series on Changes to the Construction Law 2012 by Kevin Jeffery, Graniterock Legal Counsel.

California legislators passed a flurry of laws impacting the construction industry in 2011. Most of them went into effect January 1, 2012. This is the first of a short series of articles describing these legal changes.
 
Prompt payment deadlines shortened. Senate Bill 293, signed into law by Governor Brown in October 2011, changed the prompt payment law that affects payments to subcontractors in California. Prior law dictated that general contractors were required to make progress payments to subcontractors within 10 days of the general contractor’s receipt of payment from the owner, except that if there was a good faith dispute over any amount of the progress payment due to the subcontractor, the general contractor could withhold up to 150 percent of the amount subject to that dispute. The same rules applied to subcontractor payments to lower-tier subcontractors. Effective January 1, 2012, general contractors are required to make progress payments to subcontractors within 7 days of the general contractor’s receipt of payment from the owner. The withholding exception for good faith disputes continues to apply. The new law shortens the deadline to 7 days for subcontractor payments to lower-tier subcontractors, as well.
 
Maximum retention set on all California public works projects. The same Senate Bill 293 determined that, for all contracts entered into on or after January 1, 2012, the maximum retention a public agency can withhold from a general contractor is 5%. The only exception to this rule is, when a public agency’s governing body makes a public finding that a project is “substantially complex” and notices a higher retention amount in its bid, the public agency can retain a higher percentage from the general contractor.
 
Senate Bill 293 also impacts general contractor withholding from subcontractors. The law expressly states that the percentage retention withheld by a general contractor to a subcontractor (or by a subcontractor to a lower-tier subcontractor) may not exceed the percentage retention specified in the original contract. The only exception to this rule is that, if a general contractor provides written notice to subcontractors at the time of bid that payment and performance bonds will be required, and the subcontractor fails to provide a payment or performance bond, then the general contractor can withhold from the subcontractor at a higher rate.
 
(This change in the law did not affect Caltrans projects, which under existing law are required to be “zero retention” projects.)