The Subcontractor Listing Laws for California Public Works Projects
By William C Last, Jr.
A prior article provided an overview of the statutes that require a prime contractor on a California public works project to include in the bid package the name of each subcontractor who will perform work for the prime contractor in an amount in excess of one‑half of one percent of the prime contractor's total bid.
This article will discuss not only the subcontractor fair listing laws but also what rights a subcontractor has against a prime contractor who seeks to or in fact uses another subcontractor to perform the listed subcontractors listed scope of work.
1 . WHAT ARE SUBCONTRACTOR FAIR LISTING LAWS?
Prior to the establishment of subcontractor fair listing laws, it was common for successful general contractor bidders to bid-shop or bid-peddle the subcontractors bid. Bid shopping has been defined as the use of the low bid already received by the general contractor to pressure other subcontractors into submitting even lower bids. Bid peddling has also been defined as an attempt by a subcontractor to undercut known bids already submitted to the general contractor in order to procure the job.
The legislature determined, however, that such practices were 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.
2. WHEN MUST A CONTRACTOR LIST ITS SUB-CONTRACTORS?
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.
3. WHEN CAN A CONTRACTOR SUBSTITUTE A LISTED SUBCONTRACTOR?
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.
4. WHAT STATUTORY LIABILITY DOES A GENERAL CONTRACTOR HAVE FOR IMPROPERLY SUBSTITUTING A LISTED SUB-CONTRACTOR?
Public Contracts Code §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
5. WHAT RIGHTS DOES A SUBCONTRACTOR HAVE AGAINST A GENERAL CONTRACTOR WHO LISTS THE CONTRACTOR BUT FAILS TO SEEK A SUBSTITUTION AND FAILS TO ALLOW THE SUBCONTRACTOR TO PERFORM THE LISTED WORK?
As stated, the Act confers right on listed subcontractor to perform subcontract unless statutory grounds for valid substitution exist. If the general contractor violates that subcontractors right, the subcontractor may file a legal action for damages against prime contractor to recover benefit of the bargain the listed subcontractor would have realized had he not wrongfully been deprived of subcontract.
In the case of R.J. Land & Associates Const. Co. v. Kiewit‑Shea ((App. 2 Dist. 1999) 69 Cal.App.4th 416) the subcontractor who was listed on prime contractor's successful bid for public contract was not used to perform work in question. The subcontractor sued the general contractor pursuant to the Act.
While the appellate court held that the Act does not create an express or implied contract between the prime contractor and the subcontractor, the court did hold that the subcontractor could recover damages from the prime contractor. The R.J. Land court held that the Act confers a right on listed subcontractor to perform the listed work unless the above-described statutory grounds for valid substitution exist. The Court held that the subcontractor's legal right to perform the work can be enforced by action for damages against prime contractor to recover benefit of the bargain listed subcontractor would have realized had he not wrongfully been deprived of subcontract.
6. WHAT HAPPENS WHEN THERE IS A WITHDRAWAL OF A BID BY A SUB-CONTRACTOR?
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. The defenses include:
(1) The general contractor should not have relied on the bid because it was so low in comparison to the other bidders.
(2) The general contractor shopped the bid and did not rely on it.
(3) The subcontractor refused to sign the contract because the general contractor's contract contained unfair and unreasonable language.
(4) Once the general contractor learned of the bid it should have withdrawn the bid from the public entity.
A number of bid protests are based on a prime contractor's failure to comply with the Act. It is easy to overlook the requirements of the Act in the rush to submit a timely bid.
If you are a prime contractor bidding on a public works project you should review the requirements of the Act with your estimators. You should be sure that you have listed a subcontractor for any work in excess of one half of one percent if you do not to intend to perform that work. If you intend to perform the work, you should review the licensing requirements for performing that work. You should also review the subcontractor=s bid to determine if there are exceptions or special subcontract terms in the bid. If you list a subcontractor whose bid includes such exceptions or special subcontract terms you may find it difficult to substitute a new subcontractor if listed subcontractor refuses to sign a subcontract that does not include the bid exceptions and/or subcontract terms.
If you are subcontractor whose bid is listed you should familiarize yourself with your obligations to enter into a subcontract if you are the listed subcontractor. You should also submit your bid along with any exceptions and/or contractual language requirements by facsimile prior to the bid opening. Timely written bid exceptions and/or contractual language requirements may be the basis for a limitations on the scope of the work in the subcontract and elimination of unfavorable contract clauses.
Finally, if you are a listed subcontractor who wants to perform the work, but the prime contractor wants to replace you with another subcontractor, you should notify the owner, in writing, that you object to the substitution. If the prime contractor substitutes you without a hearing you should consult with an attorney to determine if you should institute a legal action against the prime contractor.
This article, © 2002, was written by William C. Last, Jr. of Last, Harrelson & Faoro. Mr. Last is an attorney who has been specializing in Construction Law for over eighteen years. Mr. Last also holds a California A&B contractors license. If you have any questions Mr. Last can be contacted at 415‑764‑1990 or 650-425-7679. He has other articles on his web site: lhfconstructlaw.com. This bulletin is published periodically to provide general information about current legal issues. If you have a specific legal question or need legal advice, you should contact an attorney.