California’s impact on the overall U.S. economy cannot be understated. Not only does it account for about 13% of the country’s overall GDP, California alone qualifies as the 7th or 8th largest economy in the world, larger than the economies of countries such as Russia, India, and 2018 Winter Olympics host South Korea. Wow!
As one would expect given the state’s massive economy, the level of construction activity in California is also extremely high. But while more activity brings more opportunity, it also brings the same construction payment issues that we see across the country, including pervasive instances of slow payment and the ever-present threat of non-payment. California is, of course, not immune from these problems.
Fortunately, there are many tools available to the construction industry to remedy instances of non-payment on construction projects, and today we wanted to take a closer look at one such tool, the California Stop Payment Notice.
Public Projects vs. Private Projects
When a construction company is confronted with a non-payment issue on a construction project, the type of construction project is one of the main factors that determines which tool should be used to try to fix the issue and get paid. [Note: here is a quick breakdown on the different types of construction projects.]
We often break it down something like this: generally speaking, mechanics liens for private projects, and payment bond claims for public projects.
However, there’s another wrinkle to account for — while public projects generally require payment bonds, these bonds are only required after a certain threshold is met. So what happens if a project is public, but a bond isn’t required? In many states, this could create a gap in protection for claimants. Luckily, those in the California construction industry where this gap exists are covered by the Stop Payment Notice.
Why Wouldn’t a Bond Be Present on a Public Project in California?
Here are a few reasons a bond might not be present on a public project:
> The project is less than $25,000. Payment bonds are only required for projects that exceed $25,000 in California.
> The project was projected to cost less than $25,000, but the cost has exceeded projections. This one is pretty self explanatory.
> The public entity screwed up. While extremely unlikely, it’s possible that a public entity just failed to require bonding where it should have been present.
The public entity doesn’t have to provide a bond. Under the California Little Miller Act, some public entities don’t need to require payment bonds. This includes the Legislature, the courts, any agency in the judicial branch of government, and the University of California.
Protect Your Payments Without a Payment Bond with a Stop Payment Notice
In California when there is no bond present on a public construction project, a claimant can send a Stop Payment Notice (also commonly referred to as a Stop Notice). Here’s a quick definition:
A stop notice is a document given for the purpose of stopping, intercepting, or freezing funds that have not yet been paid on a construction project in an attempt to ensure payment.
Stop Payment notices are incredibly useful, particularly on projects that cannot be liened or don’t have bonds. A claimant can think of it sort of like a lien on public funds. After the Stop Payment Notice is sent, the public entity must withhold an amount sufficient to satisfy the claim for nonpayment.
In California, the 20-day preliminary notice must have been sent in order for a Stop Payment Notice to take effect. A Stop Payment Notice must also adhere to form requirements – such as this free Stop Payment Notice form provided by levelset (we refer to it simply as a “Stop Notice”).
This notice must be sent via certified mail, return receipt requested – and it must go to the public entity commissioning the work as well as the prime contractor. Finally, Stop Payment Notices must be sent at the earlier of:
- (a) 30 days from the recording of a Notice of Completion for the project; or
- (b) within 90 days from the actual completion (if no Notice of Completion was recorded).
Limitations of Stop Payment Notices
Of course, there are some limitations when utilizing a Stop Payment Notice. First, much like payment bond claims, a stop payment notice does not actually encumber the underlying project property. Of the construction payment remedies, only a mechanics lien will do that.
A stop payment notice also has some limitations that a bond claim doesn’t. A payment bond is essentially a pile of money against which a claimant can file their claim. Thus, when a payment bond claim is made, there’s definitely going to be at least some money there to pay out that claim. A stop payment notice, however, merely stops, freezes, or intercepts funds. So, if the public entity has already paid out a significant portion of funds, it’s conceivable that a stop payment notice will not be effective to freeze the entire claim amount.
Further, while a payment dispute or stop payment notice may affect a contractor’s reputation, a stop payment notice does not strike fear in the heart of a contractor like a mechanics lien or payment bond claim might.
Stop Payment Notices may have their flaws, but they fill an important gap for California claimants. When a public project is in play and payment bonds have not been provided, a Stop Payment Notice can go a long way to ensure payment.
More California Construction Payment Resources
Are you experiencing a payment issue on a construction project in California? Do you just want to learn more about sending notices, how mechanics liens work, deadlines, and more? Click on the banner below to visit all of levelset‘s resources for the great state of California!