Just like many other states across the country, California is stepping up its commitment to infrastructure. On May 13, 2022, Governor Gavin Newsom announced that the state’s proposed budget would include $37 billion to “rebuild California,” with money allocated for expanding broadband and housing resources, as well as a $128.3 billion investment in the state’s public education system — all of which will include significant construction. Additionally, As part of the Biden administration’s Build Back Better plan, the federal government is allocating over a trillion dollars in funding for public infrastructure construction projects over the course of the next decade — and a lot of that funding is going to go directly to individual states.
Despite public works construction often serving as a source of major benefit for contractors, the misconception that these projects don’t run into the same payment challenges as private projects isn’t true. Contractors deal with payment issues on these projects just as much — or more — as they deal with them on private ones. In fact, Levelset’s 2022 Cash Flow & Payment survey results indicate companies working on public projects are more likely to report slow payment and payment problems than those on private projects.
Payment protection on California public projects
Though payment challenges are often similar on any project, payment protection is very different between private and public work. Contractors on public projects aren’t allowed to file mechanics liens when payment problems arise, as the federal government (and most states) explicitly prohibits private entities from claiming an interest in public property.
Public construction projects need to secure a payment bond prior to the start of work. If payment problems come up, contractors file claims against this payment bond — not the property itself.
At the federal level, the Miller Act provides directly for this payment protection, and most states have their own version of it with laws usually called “Little Miller Acts.” California has its own Little Miller Act, which applies to any public works contract with a value over $25,000. For these contracts, primary contractors need to secure payment and performance bonds equal to 100% of the value of the contract.
Just as with most other states, the protections offered under the state’s Little Miller Act go far: Contractors that provide labor and/or materials to a project’s general contractor, subcontractor, or sub-subcontractor are able to make a claim against the payment bond, while general contractors and suppliers to suppliers are generally the only parties that are excluded from payment protections.
California preliminary notice requirements
Preliminary notices are some of the most helpful things contractors can use to keep the payment process running smoothly. They let property owners, construction lenders, and general contractors know who is working on a project. This provides protection for participants against getting served with a surprise lien from someone who was otherwise unknown to them on a project.
In California, you need to send a preliminary notice — usually called a Preliminary 20-Day Notice — to maintain the right to file a bond claim on a public works project.
True to the name, contractors need to send a preliminary notice within 20 days of first furnishing labor and/or materials. It’s important for contractors to send preliminary notices as soon as possible — in fact, you can even send them early — as it’s possible for contractors to send notices too late and fail to cover bond claim rights on parts of their work.
For both a bond claim and a stop payment notice, all claimants who weren’t hired directly by the prime contractor need to send preliminary notices. For all filing contractors, suppliers, and vendors, preliminary notices need to be sent to the public entity commissioning the work, the project’s general contractor, and the surety.
California law requires that preliminary notices contain specific information, including:
- Name and address of the owner
- Contact information for the prime contractor
- Name and address of the construction lender (if applicable)
- Description of the site sufficient for identification, including street address
- Name, address, and project role of the claimant
- The name and address of the party that contracted with the claimant
- General statement of work provided
- An estimate of the total price of the work to be provided
- A specific, 235-word statement giving official notice
This information is too important to be left out! California’s lien law strictly enforces these rules, and contractors could lose their bond claim rights if not properly followed.
Learn more about California lien law: California Mechanics Lien Rules & FAQs
California prompt payment on public projects
As with all states, California has specific rules that regulate prompt payment on projects and ensure contractors are paid in a timely fashion — with penalties if the rules of the state’s Prompt Payment Act aren’t followed.
After receiving a progress payment request, a public entity has to provide payment within 30 days (with this deadline extended to 39 days for state university projects), and final payments and retainage need to be released to the general contractor within 60 days after project completion.
Once the project’s prime contractor has received payment from the public entity, they have to pay their subcontractors and suppliers within 7 days (unless the government body is a public utility, in which case the deadline is extended to 21 days). However, this rule can be modified if the two parties agree to different timing as part of the contract.
If payment is wrongfully withheld on a project, interest builds up — with the rate of interest depending on whether the payment is coming from the public entity to the prime contractor, or from the prime contractor to the project’s subcontractors. Progress payments improperly withheld by a public entity accrue interest 10% per year, or 0.833% per month. For general contractors and subcontractors who withhold payment, this interest penalty is 2% per month.
California prevailing wage laws
Prevailing wage laws require that contractors and subcontractors on public works projects have to pay the majority of their workers at least the local prevailing wage. In California, this applies to any contract over $1,000.
Contractors that don’t comply can find themselves investigated by specially-formed committees which California uses to resolve prevailing wage disputes and which can bring an action against a contractor. These actions have to be brought up within 18 months of filing a Notice of Completion on a project.
If an action is successful, a court will award employees back wages, plus interest, from the date that the wages were due. Additionally, parties that fail to properly pay the prevailing wage may face penalties of $200 per day per worker that is affected.
California bond claim law
Preliminary notices maintain bond claim rights in California, and these rights offer two kinds of protection: bond claims against a contractor’s bond, and a stop payment notice claim against the contract funds. When there isn’t a bond present on a public construction project, claimants can instead use a stop payment notice in order to stop or freeze funds on a project in order to speed up nonpayment.
California law doesn’t make a distinction between which parties are allowed to file a bond claim or stop notice, and the claims may actually be asserted in the same document. Bond claim rights protect subcontractors of any project tier, material suppliers, contractors performing site improvement work, and fringe benefit trust funds.
A claim against the payment bond must be sent to the surety and to the general contractor, while a stop payment notice against the contract funds needs to be filed with the director of the department that entered into the contract (if the project was a state project), or filed with the controller of the managing body that awarded the contract (for any non-state public project).
It’s important to note the requirements for who actually needs to send a bond claim. Claimants who failed to send a preliminary notice have to serve a claim; if notice was sent, the claim is not required — but is still recommended.
The deadline to file a bond claim is within 15 days of the Notice of Completion or 75 days from actual completion (if no Notice of Completion is filed or served). The claim is eligible to be enforced after the claimant’s last date of furnishing labor and/or materials, but no later than six months after the deadline to serve a stop payment notice expires.
A claim against the payment bond must include:
- The value of labor and/or materials furnished or to be furnished to the project
- The name of the party who hired the claimant to furnish the labor and/or materials
- A description of the labor and/or materials furnished
- The name of the claimant
A stop payment notice has to include:
- The claimant’s name and address
- A general description of the work to be provided
- The value of the labor and/or materials already furnished, as well as the value of the total labor and/or materials to be furnished
- The name of the party who hired the claimant
- Verification by the claimant or their agent
California False Claims Act
California has a good amount of laws that protect all parties on public works projects, and one that has huge implications for public works projects is the California False Claims Act (CFCA). This act allows private individuals to bring actions on behalf of the government in reaction to attempts at defrauding California.
When it comes to public works construction, this could apply to any exaggerated invoice or otherwise false claim for payment that a contractor might make.
As Levelset’s Alex Benarroche notes, “when a contractor or subcontractor is performing work on a public project, the California False Claims Act raises the stakes a bit.” False claims are dangerous and create liabilities for contractors regardless of the context, but “when that happens on a California public project, serious penalties could come into play because that could amount to an attempt to defraud the state government,” Benarroche continues.
Parties that violate the CFCA may be liable for triple the amount of damages that the political entity sustained, as well as the costs of the civil action, and a fine between $5,500 and $11,000.
California public project payment transparency
In 2018, California introduced a new law to encourage a higher level of transparency on public works projects. As prompt payment laws set requirements for the speed at which payment needs to be sent down the chain from government entities to contractors, it’s important for subcontractors and suppliers to know when payment has passed from a government entity to a project’s general contractor.
This is where California AB 1223 comes in. Within 10 days of a construction contract payment for projects valued over $25,000, a state agency needs to post the following on their website:
- The project for which the payment was made
- The name of the construction contractor that was paid
- The date the payment was made, or the date the state agency transmitted instructions to make the payment
- The payment application number or other identifying information
- The amount of the payment
This is a huge boost to subcontractors and suppliers in the state, as transparency isn’t just optionally increased — it’s now legally required.
Protect your payment rights on every public project
Though there are a number of guidelines that absolutely need to be followed in order to secure payment rights on public projects, going the extra mile can ensure that you’re completely protected from nonpayment on public projects.
Though preliminary notices are required on California public projects anyway, it’s important to file them early and as often as needed in order to ensure that bond rights are maintained on the full duration of work done. Even beyond maintaining bond rights, sending a preliminary notice maintains a line of communication throughout the chain on a construction project, giving all contractors involved the opportunity to make sure that slow payment and other disputes are taken care of early.
When a company is dealing with necessary documentation like preliminary notices in this way, too, proper document retention and management is an absolute must for making sure that protecting your payment rights is a smooth process. Especially when sending notices and maintaining the proper documents needed for claims, it can be incredibly beneficial for you to have an organized policy for document retention.
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