Are You Shifting From Private Contracts to
California Public Works Contracts Due to the Economy?
A Short Primer On Some of the Unique Aspects
of California Public Works Contracts
William C. Last, Jr.
Attorney at Law
As a result of the significant contraction in private works construction projects, many contractors are considering shifting their focus to California public works projects. If you are considering such a shift you must be aware of the some of the unique requirements and aspects of public works contracts. This article will discuss some of the unique aspects of California Public Works projects.
1. Competitive bidding requirement.
Most California public works projects are competitively bid. The public must advertise for bidders and the bids must be publically opened.
There are two Public Contract Code sections (20161 and 20162) that mandate that California public works projects be competitively bid. There are some public entities (e.g. charter cities) that are not subject to the competitive bidding statutes. There are also certain contracts that are not covered by the competitive bidding statute. For example, emergency work and small contracts under a certain dollar amount. It should also be noted that there is a shift to design build contracting. The entities that are authorized to enter into design build contracts must be authorized to do so by the state legislature.
The public works competitive bidding laws are intended "to eliminate favoritism, fraud and corruption in the awarding of public contracts." Work that is exempt from competitive bidding includes emergency work, small contracts (each agency defines a different amount for "small") and specialized personal services. There are three requirements that must be met before the bid can be awarded. Generally, the project can only be awarded to the lowest responsible bidder who submits a responsive bid.
A responsible bidder must typically be a licensed contractor who has not been barred from government contracts for prior misconduct. In addition, a responsible bidder must have the equipment and skills necessary to perform the work in question or have a subcontractor who has those particular skills. If the bidder is deemed not responsible because it does not meet the above criteria, the public agency need not award the contract the lowest bidder. The public agency can specify the license that is required and if the contractor does not have such a license it will be disqualified.
The second requirement is that the bid be responsive. Quite simply, the bid must be an unconditional offer to provide the goods and services that are being bid upon and the bid must comply with all the bid procedures that are set forth in the requirements of the bid documents. For example, a bid which excludes a portion of the work which was to be bid on is deemed non-responsive. The public agency can specify the license that is required.
2. Prequalification Requirements For Public Works Projects and Debarment.
Public Contract Code §20101 concerns prequalification. This code section, that is independent of the section that applies to public schools, allows a public entity to require that each prospective bidder for a contract complete and submit to the entity a standardized questionnaire and financial statement in a form specified by the entity, including a complete statement of the prospective bidder's experience in performing public works.
This new legislation called on the Department of Industrial Relations, in collaboration with affected agencies and interested parties, to develop model guidelines for rating bidders, and draft a standardized questionnaire, that may be used by public entities. If a public entity decides to use the standardized questionnaire, it is required to adopt and apply an objective uniform system of rating bidders on the basis of the completed questionnaires and financial statements, in order to determine both the minimum requirements permitted for qualification to bid, and the type and size of the contracts upon which each bidder shall be deemed qualified to bid.
The criteria that are used by a number of public entities in their uniform system of rating bidders include: (a) similar projects that have been completed by the contractor within the last five years; (b) prior defaults by the contractor and/or prior bankruptcy filings; (c) the type of license the contractor holds; (d) disqualification on prior jobs; (e) assessment of liquidated damages on earlier projects; (e) prior terminations; (f) bondability; (g) insurability; (h) workers compensation experience; (i) violation of regulations and rules; and (j) financial strength. Typically, answers to the questionnaire are assigned a preset number of points. The bidder will be determined to be qualified if it has a minimum number of points
The statute allows for the public agency to prequalify prospective bidders on a quarterly basis. The prequalification can be valid for one calendar year following the date of initial prequalification.
Under the statute, the bidder has the right to dispute the public agency’s proposed prequalification rating prior to the closing time for receipt of bids. The statute provides that the “appeal process shall include the following: (1) Upon request of the prospective bidder, the public entity shall provide notification to the prospective bidder in writing of the basis for the prospective bidder's disqualification and any supporting evidence that has been received from others, or adduced as a result of an investigation by the public entity. (2) The prospective bidder shall be given the opportunity to rebut any evidence used as a basis for disqualification and to present evidence to the public entity as to why the prospective bidder should be found qualified.” It should be noted that if the bidder fails to make a timely objection, the proposed rating will become effective without further proceedings.
Generally, public agencies are limiting their prequalification process to general contractors, but the statutes do not preclude an agency from prequalifying or disqualifying a subcontractor. However, in the event a subcontractor is disqualified, it does not necessarily follow that the prequalified general contractor also no longer is qualified.
--Prequalification for school districts
As previously stated, Public Contract Code §20101 generally is not applicable to school districts. There is a separate section of the Public Contract Code that applies to school districts. Public Contract Code §20111.5 provides that “the governing board of the district may require that each prospective bidder for a contract, as described under Section 20111, complete and submit to the district a standardized questionnaire and financial statement in a form specified by the district, including a complete statement of the prospective bidder's financial ability and experience in performing public works.”
As is the case of other public agencies, the questionnaire and financial statement must be verified under oath by the bidder. Similarly, if a school district uses a questionnaire, it is required to adopt and apply a uniform system of rating bidders on the basis of the completed questionnaires and financial statements, in order to determine the size of the contracts upon which each bidder shall be deemed qualified to bid.
If bidder prequalification is required, the district must also provide to the bidder a standardized proposal form that, when completed and executed, shall be submitted as his or her bid. Bids not presented on the forms so furnished shall be disregarded. The district cannot accept the required proposal form from “any person or other entity who is required to submit a completed questionnaire and financial statement for prequalification, but has not done so at least five days prior to the date fixed for the public opening of sealed bids or has not been prequalified, pursuant to subdivision (b), for at least one day prior to that date.”
--Failure To Comply With Prequalification Requirements
As previously stated, a public works contract can only be awarded to the responsible bidder who submits the lowest responsive bid. The failure to submit a completed prequalification questionnaire and financial statement can result in a public agency’s determination that the bid is non-responsive.
The prequalification questionnaire, financial statement, and the uniform system of rating bidders are intended to determine, in advance, if a bidder is responsible to perform a certain type of job. In Taylor Bus Service, Inc. v. San Diego Board of Education (1987) 195 Cal.App.3d 1331, the appellate court held that a determination by a public agency that a contractor is not responsible, entitles that contractor to a hearing as that determination of nonresponsibility. Public Contract Code § 20101 provides that “the prospective bidder shall be given the opportunity to rebut any evidence used as a basis for disqualification and to present evidence to the public entity as to why the prospective bidder should be found qualified.” The appeal process can include: (a) the contractor providing a written explanation for any anomalies in its application; (b) meeting with the public entity staff; (c) meeting with the upper level public agency management; and (d) appealing to the governing board of the public agency.
However, the prequalification section that applies to school district projects, Public Contract Code §20111.5, does not have such a provision. If a contractor’s prequalification request is denied, it should contact an attorney who is familiar with applicable hearing and appeal rights to review the specific facts and determine a course of action.
Public entities may bar certain contractors from bidding based on prior quasi-judicial hearings where the barred contractor is found to be irresponsible. The hearings must afford the contractor its due process rights.
3. Bonds are required.
The bid must also be accompanied by a bid bond. Once the contract is awarded the winning contractor must post a performance and payment bond with the public agency. The performance bond is for the benefit of the public agency since it ensures the contractor’s performance of its contract obligations. The payment bond is for the benefit of the subcontractors and suppliers. In the event the contractor doesn’t pay a subcontractor and/or supplier the unpaid party can recover the unpaid balance from the surety.
A prime contractor can require a subcontractor to be bonded if it includes such a requirement in its advertisement for bidders.
4. Subcontractor Listing requirements
The California legislature has determined that bid shopping is not in the best interest of the public and thus established the fair listing laws. Those laws are referred to as the "Subletting and Subcontracting Fair Practices Act" and can be found at Public Contract Code '4100 et seq. (hereafter "the Act"). Generally, the Act requires the subcontractors to be listed on all state and local public agency contracts and allows substitutions of the listed subcontractor under very limited circumstances.
Under most circumstances, subcontractors must be listed in the bid. Public Contracts Code '4104 states that public project specifications or general bidding conditions must require persons making bids to set forth the names and locations of subcontractors which will perform work in excess of one-half of one percent of the total bid (or, in the case of streets, highways, or bridges, work in excess of one-half of one percent of the total bid or $10,000.00, whichever is greater). The bidding contractor must also set forth the portion of the work which will be done by each subcontractor. The prime contractor may list only one subcontractor for each portion as is defined in his or her bid.
Generally, once a subcontractor is listed the general contractor may not substitute another subcontractor for the same work. California Public Contracts Code '4107 provides that no prime contractor whose bid is accepted may substitute another subcontractor in place of the subcontractor listed in the original bid. However, there are exceptions, the awarding authority may, except as otherwise provided, consent to the substitution of another person as a subcontractor in any of the following situations:
(1) When the subcontractor listed in the bid, after having had a reasonable opportunity to do so, fails or refuses to execute a written contract, when that written contract, based upon the general terms, conditions, plans and specifications for the project involved or the terms of that subcontractor's written bid, is presented to the subcontractor by the prime contractor.
(2) When the listed subcontractor becomes bankrupt or insolvent.
(3) When the listed subcontractor fails or refuses to perform his or her subcontract.
(4) When the listed subcontractor fails or refuses to meet the bond requirements of the prime contractor (provided such bond requirements are included in the prime contractor=s bid solicitation materials);
(5) When the prime contractor demonstrates to the awarding authority that the name of the subcontractor was listed as the result of an inadvertent clerical error.
(6) When the listed subcontractor is not licensed pursuant to the Contractors' License Law.
(7) When the awarding authority, or its duly authorized officer, determines that the work performed by the listed subcontractor is substantially unsatisfactory and not in substantial accordance with the plans and specifications, or that the subcontractor is substantially delaying or disrupting the progress of the work.
Prior to approval of the prime contractor's request for the substitution, the awarding authority must give notice in writing to the fisted subcontractor of the prime contractor's request to substitute and of the reasons for the request, by certified or registered mail to the subcontractor's last known address. The subcontractor has five working days within which to submit written objections to the substitution to the awarding authority. If the subcontractor objects, the awarding authority must give notice in writing within at least five working days to the listed subcontractor of a hearing by the awarding authority on the prime contractor's request for substitution.
Public Contracts Code '4105 states that listing other contractors who will in turn sublet portions constituting the majority of the prime contract work is a violation of Public Contracts Code '4104 and subjects the prime contractor to penalties set forth the Act. Public Contracts Code '4106 states that if a prime contractor fails to specify a subcontractor when so required, the prime contractor agrees that he or she is fully qualified to perform that portion himself or herself and will in fact perform that portion of the work. The issue that can arise is whether the general contractor has the appropriate license to perform that work. For example, fire sprinkler work can only be performed by a contractor who has such a speciality license. Thus, if a general contractor doesn't have a fire sprinkler license he must list an appropriately licensed subcontractor. If such a speciality subcontractor is not listed, the bid may be subject to a successful bid protest.
If after the award of a contract, the prime contractor subcontracts, except as otherwise provided for in the Act, any such portion of the work, the prime contractor shall be subject to the penalties. The penalties are set forth in Public Contracts Code '4110 which states: "A prime contractor violating any of the provisions of this chapter violates his or her contract and the awarding authority may exercise the option, in its own discretion, of (1) canceling his or her contract or (2) assessing the prime contractor a penalty in an amount of not more than 10 percent of the amount of the subcontract involved, and this penalty shall be deposited in the fund out of which the prime contract is awarded. In any proceedings under this section the prime contractor shall be entitled to a public hearing and to five days notice of the time and place thereof." A violation of the Act may also subject a prime contractor to a disciplinary action by Contractor's State License Board
If a listed subcontractor refuses to sign a contract, the general contractor can file a promissory estoppel lawsuit against the subcontractor. Such a lawsuit could result in an award of the difference of the subcontractor=s bid and the cost of completing the subcontractor's scope of work The subcontractor, however, has defenses to such a lawsuit.
5. Labor relationship requirements (Prevailing wages and Affirmative Action).
Prevailing wages must be paid on California public works projects in accordance with Labor Code section 1773.
6. “Or Equal” Clauses.
Project specifications commonly require that a specific product be supplied to the project. Such “proprietary” specifications usually require the contractor to only use a product manufactured by one company or describes a performance requirement that can only be satisfied by one manufacturer. In addition to the listed product, such specifications will occasionally allow an “or equal” product to be used.
“Proprietary specifications” are typically used because the designer does not want a substituted to be used since it can incur liability if the substituted product fails or does not work as well as the intended product. Design professionals also specify products because they are familiar with and have previously used.
If you have submitted a bid on a California public works project using a product that was not specified as being acceptable in the project specifications you will be required to comply with the specification “or equal.” It is not uncommon for a contractor to submit a bid that is based on using an alternative product that is not listed in the specifications.
If the alternative product is not accepted, the bidding contractor may be subjected to paying for the increased cost of the specified product. On occasion, the specification may list a product that requires certified installers to apply, and if an uncertified subcontractor lists an alternative product that is not accepted, that subcontractor will be forced to retain a certified applicator. Clearly, failing to comply with the specification “or equal” provisions can result in increased project costs and overruns.
The language in an “or equal” clause varies from one set of specifications to another. However, California legislature has codified what must be included in such clauses. In enacting the code section that concerns “or equal” clauses the Legislature wanted to ensure that projects were competitively bid. This article will address the requirements and the variations found in such substitution clauses.
--Typical “Or Equal” Requirements
A typical substitution clause will include the following: (1) a requirement that any proposed substitution be submitted within a fixed period of time (as few as 7 days); (2) notification by the contractor as how the substituted product will impact the completion; (3) notification by the contractor as to the difference in cost between the substituted product and the listed product; (4) a requirement that the contractor provide a detailed analysis of the difference between the listed product and the proposed product; (5) a requirement that the contractor provide (a) product identification, manufacturer literature, samples, names and addresses of similar projects where the substituted product has been used; (b) and the name and address of the manufacturer’s representative; and (7) that the contractor pay the cost of the design team to review the proposed substitution.
--California Public Contract Code Section 3400 Requirements
The California Public Contract Code, at section 3400, addresses the right to include an “or equal” clause and substitutions. That code provision starts by stating: “No agency of the state nor any political subdivision, municipal corporation, or district, nor any public officer or person charged with the letting of contracts for the construction, alteration, or repair of public works shall draft or cause to be drafted specifications for bids, in connection with the construction, alteration, or repair of public works, (1) in a manner that limits the bidding, directly or indirectly, to any one specific concern, or (2) calling for a designated material, product, thing, or service by specific brand or trade name unless the specification lists at least two brands or trade names of comparable quality or utility and is followed by the words "or equal" so that bidders may furnish any equal material, product, thing, or service.” This provision is in keeping with the general public policy, which is also codified, that construction projects are to subject to competitive public bidding whereby the contract is to be let to the lowest responsive and responsible bidder. It should be noted that the Legislature has created certain exception to that policy.
The statute also requires the public entity, if aware of an equal product manufactured in this state, to name that product in the specification.
--Unique or Novel Exception
The public entity is not required to designate at least two brands if the product application is unique or novel and that product is required to be used in the public interest, or where only one brand or trade name is known to the specifying agency, it may list only one. The issue of uniqueness is the area where the greatest debate arises.
--Time Limit To Seek Substitution
Public Contract Code section 3400 sets forth a timely limit for seeking a substitution of a product. The section states: “Specifications shall provide a period of time prior to or after, or prior to and after, the award of the contract for submission of data substantiating a request for a substitution of "an equal" item. If no time period is specified, data may be submitted any time within 35 days after the award of the contract.” It is not uncommon for the specifications to provide as few as seven days to submit the request for substitution. Thus, if you want to seek a substitution you should do so in timely manner.
Finally, Public Contract Code section 3400 states that the restriction on specifying a single product “is not applicable if the awarding authority, or its designee, makes a finding that is described in the invitation for bids or request for proposals that a particular material, product, thing, or service is designated by specific brand or trade name for either of the following purposes: (1) In order that a field test or experiment may be made to determine the product's suitability for future use, (2) In order to match other products in use on a particular public improvement either completed or in the course of completion.”
For example, a product can be specified for a remodeling project when the owner wants the existing HVAC control system to be compatible with the new system. As a result, the designer will specify a single control system.
While there are no reported cases concerning wrongfully denied substitution requests, it is the author’s belief that if the substitution is denied in bad faith, the public entity could be liable for the additional cost associated with being forced to use the listed product. Generally, public entities have a certain degree of discretion in exercising their procurement policies. However, Public Contract Code section 3400 does place limitations on that discretion.
As stated, some substitution clauses require: (1) notification by the contractor as how the substituted product will impact the completion and the difference in cost between the substituted product and the listed product; (2) require any savings resulting from the substituted product to inure to the benefit of the owner; and (3) require that the contractor pay the cost of the design team to review the proposed substitution. Most contractors will dispute the contention that the savings associated with a substituted product go to the owner for the simple fact that the savings are reflected in the lower bid price.
Under state and federal antitrust laws, if a designer and supplier collude to draft specifications that are intended to restrain competition or fix prices they maybe subject to liability. That liability can include treble damages.
If a design professional specifies a single product and that product is not available in a timely manner although the contractor timely ordered it, the contractor should be entitled to an extension of time to complete the project and maybe entitled to delay damages. By specifying a single product, the design professional impliedly warrants that the specified product is commercially available. Similarly, if the product fails and the failure is not due to contractors error, the design professional maybe liable for any damages result from that failure.
7. Bid Irregularities, Rejection of Bids and Bid Protests.
A public entity can reserve the right to waive minor irregularities relative to the responsiveness of the bid. However, if the entity waives the regularity it cannot result in the bid process being unfair or give the low bidder an unfair advantage over the other bidders.
In turn, a public entity has authority and discretion to reject all bids and to re-advertise for bids. For example, it is not uncommon for a public entity to reject all bids and re-bid the project when the bids exceed the budgeted amount for the work. Occasionally, a public entity will reject all the bids to avoid a bid protest. Irrespective, if the rejection of all bids is done in bad faith, an unsuccessful bidder should consider informing the governing body of the awarding entity of the reasons why the staff's recommendation for rejection is in bad faith.
Alternatively, the public entity can reject the lowest bidder if the lowest contractor (a) is not a responsible bidder, (b) the lowest bidder refuses to sign a contract, or (c) the bid is not responsive. However, the awarding body must act in good faith. If a public entity rejects the lowest bidder, that bidder may be entitled to a hearing if the rejected bidder was deemed be not responsible.
A disgruntled bidder, including a rejected low bidder, can file a protest with the awarding public entity. Generally, the bid documents set forth a limited period in which such a protest must be filed. If the public entity does not satisfactorily resolve the dispute, the bidder can file a legal action seeking a writ of mandate requiring the public entity to review the contract.
The appellate courts have ruled that the bidding statutes are for the benefit of the public agency not the bidder. If a contractor loses a bid dispute the contractor generally cannot seek damages from the California public body.
A public entity must comply with all bidding statutes and laws, and any failure to do so voids any contract entered into by the public agency as illegal. Furthermore, the contractor who performs the work cannot be paid. The contractor is presumed to know the authority of contract officer and the public entity.
Public works contracts are awarded by the public body (e.g. Board of Supervisors). Once the contract is awarded signing the contract is purely a ministerial act.
8. Miscellaneous Clauses
-- No Damage For Delay Clauses Are Void In Public Works Contracts
California Public Contract Code section 7102 provides:
Contract provisions in construction contracts of public agencies and subcontracts thereunder which limit the contractee's liability to an extension of time for delay for which the contractee is responsible and which delay is unreasonable under the circumstances involved, and not within the contemplation of the parties, shall not be construed to preclude the recovery of damages by the contractor or subcontractor.
No public agency may require the waiver, alteration, or limitation of the applicability of this section. Any such waiver, alteration, or limitation is void. This section shall not be construed to void any provision in a construction contract which requires notice of delays, provides for arbitration or other procedure for settlement, or provides for liquidated damages.
While that Public Contract Code section appears to be unambiguous, some public entities are attempting to draft around the statutory restriction on such clauses by limiting the clause’s application.
--Limitation on change orders and extra work
The Public Contract Code ( see sections 20136, 20139, and 20142-20143) includes sections that limit the authority of a public employee to issue change orders. Those limitations are typically based on a percentage of the the amount of the contract. If the change order exceeds that amount the public entity must approve the change order otherwise it may be deemed invalid.
Public Contract Code section 7104 provides that a contractor shall promptly, and before the following conditions are disturbed, notify the local public entity, in writing, of any: (1) Material that the contractor believes may be material that is hazardous waste, as defined in Section 25117 of the Health and Safety Code, that is required to be removed to a Class I, Class II, or Class III disposal site in accordance with provisions of existing law; (2) Subsurface or latent physical conditions at the site differing from those indicated by information about the site made available to bidders prior to the deadline for submitting bids ; and (3) Unknown physical conditions at the site of any unusual nature, different materially from those ordinarily encountered and generally recognized as inherent in work of the character provided for in the contract.
Once the local public entity is put on notice it must promptly investigate the conditions, and if it finds that the conditions do materially so differ, or do involve hazardous waste, and cause a decrease or increase in the contractor's cost of, or the time required for, performance of any part of the work shall issue a change order under the procedures described in the contract.
In the event that a dispute arises between the local public entity and the contractor whether the conditions materially differ, or involve hazardous waste, or cause a decrease or increase in the contractor's cost of, or time required for, performance of any part of the work, the contractor shall not be excused from any scheduled completion date provided for by the contract, but shall proceed with all work to be performed under the contract. The contractor shall retain any and all rights provided either by contract or by law which pertain to the resolution of disputes and protests between the contracting parties.
--Implied warranty of the plans
In every construction public works contract, the owner impliedly warrants that the plans and specifications are accurate and sufficient enough to build the project. The owner has a duty to fairly and reasonably represent the known conditions.
9. Relief from bid errors.
Bid documents usually require that the bid shall remain open to acceptance for a specific period (e.g. 60 days). On most public works projects a bid bond is required. On public works projects, the bid bond is intended to act as security that the contractor will enter into a contract if the bid is accepted. Consequently, if an error is made in the bid, the contractor will want to avoid the forfeiture of the bid bond. California Public Contract Code section 5103 sets forth the grounds for relief from a prime contractor’s bid error and thus the forfeiture of the bid bond.
Specifically, the bidder must establish that: “(a) A mistake was made; (b) He or she gave the public entity written notice within five days after the opening of the bids of the mistake, specifying in the notice in detail how the mistake occurred; (c) The mistake made the bid materially different than he or she intended it to be; and (d) The mistake was made in filling out the bid and not due to error in judgment or to carelessness in inspecting the site of the work, or in reading the plans or specifications.” The cases interpreting this section emphasize the necessity of providing a timely five-day written notice that includes sufficient facts for the public entity to determine that the error was material and not an error in judgment. Permitted errors can include, but are not limited to: (1) failing to include a subcontractor’s price in the bid; (2) failing to carry over numbers from one bid sheet to the next; and (3) combined clerical and judgmental errors.
As most contractors are aware, subcontractors typically wait to the last hour before submitting their bids to avoid bid shopping by the prime contractor. Under the California Subletting and Subcontracting Fair Practices Act, which is codified at Public Contract Code section 4100 et seq., the bidder is required to set forth the name of each subcontractor who will perform work or labor or render services to the prime contractor in an amount in excess of one‑half of one percent of the prime contractor's total bid. With a few limited exceptions set forth in the Act, the listed subcontractor must then be awarded the subcontract.
If the prime contractor relies on the subcontractor’s bid, he or she will list that subcontractor in compliance with the subcontractor listing laws. Thus, the courts have held that when the prime contractor’s bid is accepted by the public entity and the listed subcontractor refuses to enter into a subcontract, the prime contractor can recover the difference between that bid and the cost to perform the work from the recalcitrant subcontractor. The courts relied on a concept called promissory estoppel. (See Drinnan v Star Paving (1958) 51 Cal 2nd 409)
However, there are potential defenses to the promissory estoppel doctrine. The possible defenses may include: (1) the bid was materially different than the other bids for the same work; (2) the bid reserved the right to refuse to enter into a contract; (3) there was an material delay in accepting the bid; (4) the subcontract includes provisions that are fundamentally different than the typical subcontract used in the industry; and (5) the prime contractor had an opportunity to withdraw the bid, under the aforementioned code sections, but failed to do so. Since these defenses are dependent on the facts surrounding the bid, there is no guarantee that they will succeed. Nonetheless, if an error is made, the subcontractor should immediately notify the prime contractor.
The California Commercial Code, which has been held applicable to certain construction contracts, may also prevent the revocation of a “firm offer” to buy or sell goods that is to remain open for acceptance for a specific period. Typically, such offers involve a purchase order for the sale of materials rather than a construction contract for the installation of those materials. In the event that there is a dispute as to right to revoke a bid that is to remain open for a fixed time it would behoove the contractor to discuss it legal options with a qualified attorney.
10. Claims against public agencies
It should come as no surprise to a public works contractor that their contractual requirements are unique. When it comes to resolving disputes with local public agencies, the California legislature has enacted special procedures for pre-litigation resolution of claims that have a value less than $350,000.
The local public agencies that the procedures are intended to apply to are California cities, including a charter city, a county, and a city and county, and any similar public entity. The claims procedures do not, however, apply to California state agencies, the California University system, the State University system or contracts that provide for claim resolution through the arbitration process that is specifically set forth in section 10240 of the California Public Contract Code. Since those entities typically have their own set of procedures, this article will only discuss the special local public agencies pre-litigation claim procedures for claims under $375,000.
In recent years the term “construction claims” has taken on a negative connotation. Many owners and contractors associate the terms with litigation. However, the term “construction claim” refers to a demand by the contractor for (a) a time extension, (b) payment of money arising from work done by, or on behalf of, the contractor pursuant to the contract for a public work and payment of which is not otherwise expressly provided for under the contract scope of work, or (c) an amount the payment of which is disputed by the local agency. Claims that fall within that definition and which are less than $375,000 are subject to the special procedures outlined below.
The procedures are set forth in California Public Contract Code section 20104. The law requires that the claims resolution procedures be set forth in the public entity’s specifications. The specific requirements that must be met are determined by the amount of the claim. The two categories are claims less than $50,000 and claims that are greater than $50,000 but less than $375,000. Considerable portions of the remainder of this article are excerpted directly from the applicable Code sections.
--The Claim Must Be Timely and In Writing
For all claims the claim must be in writing and include the documents necessary to substantiate the claim. The claim must be filed on or before the date of final payment. However, if the contract includes claim notice requirements and/or earlier dates for the submission of the claim the deadlines apply. It should be noted that most public works contracts require the contractor to notify the agency within a certain time period of any potential or actual claims. Such contracts also include specific deadlines for the actual presentation of the claim.
--Timing Deadlines For Claims Less Than $50,000
For claims of less than fifty thousand dollars ($50,000), the local agency is required to respond, in writing, to the written claim within 45 days of receipt of the claim. Alternatively, the agency may request, in writing, within 30 days of receipt of the claim, any additional documentation supporting the claim or relating to defenses to the claim the local agency may have against the contractor.
If additional information is thereafter required, it shall be requested and provided upon mutual agreement by the local agency and the contractor. The local agency's written response to the claim, as further documented, shall be submitted to the contractor within 15 days after receipt of the further documentation or within a period of time no greater than that taken by the claimant in producing the additional information.
--Timing Deadlines For Claims Between $50,000 and $375,000
For claims of over $50,000 but less than $375,000, the local agency shall respond in writing to all written claims within 60 days of receipt of the claim. Alternatively, they may request, in writing, within 30 days of receipt of the claim, any additional documentation supporting the claim or relating to defenses to the claim the local agency may have against the contractor.
If additional information is thereafter required, it shall be requested and provided upon mutual agreement by the local agency and the contractor. The local agency's written response to the claim, as further documented, shall be submitted to the claimant within 30 days after receipt of the further documentation, or within a period of time no greater than that taken by the contractor in producing the additional information or requested documentation.
--Meet and Confer Sessions With The Public Agency
For all claims, if the contractor disputes the local agency's written response, or the local agency fails to respond within the time prescribed, the contractor may so notify the local agency, in writing, either within 15 days of receipt of the local agency's response or within 15 days of the local agency's failure to respond within the time prescribed and demand an informal conference to meet and confer for settlement of the issues in dispute. Upon a demand, the local agency shall schedule a meet and confer conference within 30 days for settlement of the dispute.
--Filing A Government Code Written Claim Notice
Following the meet and confer conference, if the claim or any portion remains in dispute, the claimant may file a claim under the “Torts Claims Act.” During the time that you are complying with these special claims procedures the time for filing a claim under the “Torts Claims Act” is tolled from the time the claimant submits his or her written claim until the time that claim is denied as a result of the meet and confer process, including any period of time utilized by the meet and confer process.
The California Government Code requires that formal written notice be given to the public agency within certain deadlines. Generally, those deadlines can be between six months to one year after the acts that give rise to the claim arose. Those requirements are referred to as the “Torts Claims Act.” While the title refers to torts, which are wrongful acts for which civil liability may exist other than those predicated on a contractual relationship, the courts have required that the notice provisions also be met when there is a breach of contract claim.
The formal claim is intended to give the public agency an opportunity to investigate and resolve the claim before litigation is commenced. Thus, the notice requirements must typically be satisfied before a lawsuit can be commenced. The requirements of the “Torts Claims Act” are beyond the scope of this article. It should be noted that “Torts Claims Act” requirements are so specific and time sensitive that many attorneys do fully under the Act’s nuances. Thus, if the claim cannot be resolved before the deadline for filing the formal document which is required by the “Torts Claims Act, ” you should consult with an attorney to be sure that all the requirements are met.
--The Agency’s Obligation To Pay Undisputed Amounts
The statute also states that the local agency must pay the undisputed contract balance unless otherwise provided in the contract. If the public agency refuses to pay the undisputed progress payment balance it would behoove the contractor to advise the agency of the prompt payment statutes. Those statutes have been discussed in prior articles that the author has written.
11. False Claims
Under the California Act, a "Claim” includes any request or demand for money, property, or services made to any employee, officer, or agent of the state or of any political subdivision, or to any contractor, grantee, or other recipient, whether under contract or not, if any portion of the money, property, or services requested or demanded issued from, or was provided by, the state (hereinafter "state funds") or by any political subdivision thereof (hereinafter "political subdivision funds").” It should be noted that the submission of the false claim need not be made with a specific intent to defraud the public entity. However, the false claim must be made by the claimant actually knows the information is false; acts in “deliberate ignorance of the truth or falsity of the information;” or “acts in reckless disregard of the truth or falsity of the information.”
--What Acts Are Prohibited?
The acts which are prohibited under the State and Federal False Claims Acts are:
(1) Knowingly presenting or causing to be presented to the state or any political subdivision, a false claim for payment or approval.
(2) Knowingly making, using, or causing to be made or used a false record or statement to get a false claim paid or approved by the state or by any political subdivision.
(3) Conspiring to defraud the state or any political subdivision by getting a false claim allowed or paid by the state or by any political subdivision.
(4) Having possession, custody, or control of public property or money used or to be used by the state or by any political subdivision and knowingly delivering or causing to be delivered less property than the amount for which the person receives a certificate or receipt.
(5) A person who is authorized to make or deliver a document certifying receipt of property used or to be used by the state or by any political subdivision, knowingly makes or delivers a receipt that falsely represents the property used or to be used.
(6) Knowingly buying, or receiving as a pledge of an obligation or debt, public property from any person who lawfully may not sell or pledge the property.
(7) Knowingly making, using, or causing to be made or used a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the state or to any political subdivision.
(8) When a person who is a beneficiary of an inadvertent submission of a false claim to the state or a political subdivision subsequently discovers the falsity of the claim, and fails to disclose the false claim to the state or the political subdivision within a reasonable time after discovery of the false claim. (Note: this category is not included in the federal False Claims Act).
It should be noted that the eighth category can place a general contractor who submits a subcontractor’s false claim in jeopardy for violating the false claims statute. It should also be noted that a subcontractor who submits a false claim to a prime contractor knowing that the information will be relayed to the government can be held liable under the False Claims statutes.
--What Are The Penalties For Violating the Statute?
A violation of the California False Claims Act can result in a judgment against the offender for the costs of a civil action brought to recover the penalties or damages, and the offender may be liable to the state or political subdivision for a civil penalty of up to $10,000.00 for each false claim. Notably, the $10,000.00 penalty can be assessed for each item in a claim. For example, a pay request that includes numerous false costs can result in a penalty for each false cost.
In addition, the court may assess no less than two times, but no more than three times, the amount of damages which the state or the political subdivision sustains. However, that penalty may be abated if the court finds all of the following: (1) The person informs the public entity within 30 days of learning of the false claim; (2) The person fully cooperates with any investigation; and (3) At the time the person furnished the state or the political subdivision with information about the violation, no criminal prosecution, civil action, or administrative action had commenced with respect to the violation, and the person did not have actual knowledge of the existence of an investigation into the violation.
A false claim can also lead to disciplinary action by the Contractors State License Board.
The False Claim Act does not apply to any controversy which is less than $500.00, nor does the Act apply to a fraudulent tort claim.
12. Payment Issues
The Mechanics' Lien remedy is unavailable to one providing labor, services, equipment or materials to a California State or local government public works project. Subcontractors, laborers and material men (but not prime contractors) on state public works projects can, however, use the Stop Notice remedy and make claims against the mandatory Payment Bonds, in the event of nonpayment. The Stop Notice on a state public works project constitutes a lien on the contractor's fee held by the public agency. The two remedies are: (1) The Stop Notice or Notice to Withhold; and (2) an action against the Payment Bond.
In order for a subcontractor, suppler, material man or laborer to exercise the remedies certain legal requirements must be satisfied. The remainder of this article will discuss those requirements.
The Preliminary Lien Notice procedure on a California public works project is similar, but not identical, to that on a private project. Some of these differences are noted below: First, a Stop Notice claimant (other than a laborer for wages or an express trust fund) who had no contractual relationship with the prime contractor, must give the Preliminary Lien Notice. The Preliminary Lien Notice must be served within twenty (20) days of the first time that work, equipment or materials were furnished to the project.
Second, the contents of the Preliminary Notice varies slightly between a public and a private work. On a public work, the Preliminary Notice must contain a general description of labor, service, equipment or materials furnished or to be furnished; the name of the party to whom the labor, service, equipment or materials were furnished; and the name of the furnishing party.
Third, the notice must be served by first class mail, registered mail, or certified mail on the contractor or its subcontractor, either at his residence or anywhere he maintains an office, or by personal service. It must also be served on the department for whom the work is being performed. In the case of public works constructed by the Department of Public Works or the Department of General Services, the department is to be served through the office of the disbursing officer of the department constructing the work or by personal service on the officer.
The Stop Notice on a state or local public work must be served within thirty (30) days after the recording of a Notice of Completion, Notice of Acceptance, or Notice of Cessation. Where no Notice of Completion, Acceptance or Cessation has been recorded, the Stop Notice must be served within ninety (90) days after actual completion or cessation of work.
When serving a Stop Notice on a California state public works project, it must be served on the director of the department which awarded the contract. However, the agency may direct that the stop notice be served on some other officer of the department. For example, California General Services legal division will accept service of the stop notice. Some agencies will accept service by mail. It is strongly recommended that you check with the agency to determine the appropriate manner of service, the address for service and who will accept service.
On all other public works projects (e.g. County or City public works projects), the Stop Notice should be served on the office of the controller, auditor, or other public officer whose duty it is to make payments under the contract, or on the commissioners, trustees, officers, manager, board of supervisors, board of trustees, or other body which awarded the contract.
The Stop Notice may be served personally or by registered or certified mail.
In contrast to a Stop Notice to a lender on a private work, a public works Stop Notice need not be bonded in order to be effective. The information which must be contained in the Stop Notice on a public work is the same as required on a private works Stop Notice.
When a properly executed Stop Notice is served on the proper public official, that official must withhold from the prime contractor construction funds in an amount sufficient to satisfy the amount claimed in the Stop Notice. He is not required to release the money to the claimant, however, until the claimant has foreclosed on the Stop Notice in a court action. A suit on a Stop Notice on a public work must be filed within the following time period: Not less than ten (10) days after the filing of the Stop Notice; and not more than ninety (90) days after the expiration of the period within which Stop Notices may be filed.
If an appropriate fee is paid to the public entity, it is required to give the stop notice claimant notice of the expiration of the stop notice period ten days after a notice of completion or
after cessation of labor. The author strongly suggests that you pay the appropriate fee so that you can avail yourself of this service.
If the money withheld pursuant to all the properly filed Stop Notices is insufficient to pay all the valid claims stated in the Stop Notices, the money will be distributed pro rata among all the claimants. There is no priority established between the claimants based on when their Stop Notices were filed. Payment is made based on the ratio that the respective claims bear to the total amount of all valid Stop Notice claims.
When the prime contractor disputes the validity of any or all of the Stop Notice claims, there are two procedures which it may use to attempt to have the withheld funds released in an expedited manner.
First, the public entity may, in its discretion, allow the contractor to file a proper bond to obtain release of the withheld amounts. The bond must be issued by a corporate surety, and be in an amount equal to 125 percent (125%) of the claim stated in the Stop Notice. The bond must provide that if the claimant eventually recovers, he may also recover the costs of bringing the action.
Alternatively, if the prime contractor claims that the Stop Notice is invalid based on four limited reasons, he may attempt to obtain release of the money by a serving an affidavit on the public entity. In turn, the public entity must serve the affidavit on the stop notice claimant. If the stop notice claimant does not serve a timely counter-affidavit the public entity is obligated to release the funds. Obviously, this summary procedure is more intricate. If you intend to use this method or are served with such an affidavit, the author suggests that you consult with an attorney.
-- Payment Bonds
Under California law, a prime contractor must file a Payment Bond on all State Public Works Projects in excess of $5,000 and on all other public works in excess of $25,000. The Public Entity awarding the contract must approve the bond before work begins. Until the Bond is posted, the Public Entity is not allowed to pay the general contractor.
Claims on a Payment Bond are in addition to a contractor's right to file a Stop Notice. It is not necessary to file a Stop Notice Claim to make a claim on a Payment Bond, but they may be pursued at the same time. Irrespective, it is not uncommon to have a general contractor post an improper bond or a fraudulent bond. In the event that a contractor determines that there may be a fraudulent or improper bond on the project, he should immediately notify the Public Entity. It is also possible under California law to assert a claim against the Public Entity for failing to require the prime contractor to post an appropriate bond.
In order to pursue a claim on a Payment Bond, the following conditions must exist:
First, the claimant has not been paid. Second, the claimant is allowed to pursue a claim for a stop notice in the same way that he may pursue a claim on a Payment Bond. Third, the claimant is given a Preliminary Lien Notice or a claimant on a public works project can enforce his claim on a payment bond (a) by giving written notice to the surety and the bond principal within 15 days after recordation of a notice of completion, or (b) if no notice of completion has been recorded, within 75 days after completion of the work of improvement.
The foregoing alternative notice provision is an escape valve for a contractor who fails to serve a preliminary 20-day notice. The escape mechanism allows for a greater period of time to serve the notice since the time for the alternative notice is tied to the time the project is completed rather than the date the claimant completes it work. However, lien claimants should still make it a practice to give a timely twenty day preliminary notice. The claimant can only file a lawsuit if it is filed within six months after the period to file a Stop Notice has expired. It is also possible to recover attorneys' fees on a payment bond.
The author recommends that a notice of the claim be sent to the surety as soon as it becomes apparent that it will be necessary to make a claim. If the surety does not voluntarily pay the claim, a lawsuit must be filed against the payment bond surety as follows: (a) if the public entity files a notice of completion or cessation notice, thirty (30) days six plus (6) months after the notice is filed or (b) if neither a notice of completion or cessation is filed, the lawsuit must be filed ninety (90) days after the period for filing a Stop Notice expires plus six (6) months.
--- Prompt payment penalties.
Public Contracts Code §107 requires any public entity or an original contractor to pay retention within certain time periods. The public entity must pay the original contractor within sixty (60) days after completion. The original contractor must pay the subcontractors within ten (10) days of receipt of the funds by the original contractor. However, a contractor or public entity can back charge up to 150% of the disputed amount if there is a good faith dispute. If the funds are not paid in the timely manner, there is a two percent (2%) per month penalty in lieu of interest and attorneys' fees and costs are given to the prevailing party.
Public Contracts Code §10261.5 concerns progress payments. A state agency must pay a contractor within thirty (30) days. A state university must pay a contractor within thirty-nine (39) days. If the funds are not paid in a timely manner, there is a ten percent (10%) per annum penalty.
Public Contracts Code §10262.5 concerns progress payments by a prime contractor or subcontractor to all tiers of subcontractors. The statute requires payments within ten (10) days of receipt by the contractor or subcontractor. If the time periods are not met, the penalty is two percent (2%) in addition to interest, plus attorneys' fees and costs to the prevailing party. A contractor or subcontractor may however retain up to one hundred fifty percent (150%) of disputed amounts if there is a good faith dispute.
Public Contracts Code §20104.5 concerns payments by a local government agency to a contractor. The statute requires payment within thirty (30) days after receipt of the contractor's payment request. A failure to pay that sum subjects the local government agency to a ten per cent (10%) per annum penalty.
There are other Business & Professions Code sections concerning penalties assessed as well as license revocation in the event of nonpayment.
The foregoing review of some of the differences between California private works and California public works is not intended to be exhaustive nor does in cover federal procurement and contract practices.This article, ©2010, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 30 years.. In addition to belonging to a number of construction trade associations, Mr. Last holds a California “A” and “B” license. He can be contacted at 415-764-1990 or 650-425-7679. A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.