California Adopts Game-Changing Public Works Claims Legislation

03.01.2017

California contractors and public agencies are undoubtedly familiar with the intricate claims presentation requirements that have become commonplace in public works contracts. Public owners have generally been free to develop their own individualized construction contracts. Like the proverbial snowflake, no two public works contracts are exactly alike. Each typically contains a different contractual claims provision which may vary greatly from the next in terms of the levels of dispute resolution required, the documentation public works contractors are required to submit, the time requirements for submission of claims, and other requirements. At times, the contractual claims process can present a trap for the unwary contractor in that the failure to exhaust the contractual procedures may result in a forfeiture of the contractor’s right to pursue its claim in court.

On January 1, 2017, California enacted new legislation that standardizes the claims procedures for virtually all public works contracts, and implements significant changes to the way claims are processed. Assembly Bill 626 (AB 626), which is codified in Public Contract Code section 9204, applies to all public works contracts entered into on or after January 1, 2017, with the exception of projects under the jurisdiction of the following State departments: Department of Water Resources, Department of Transportation, Department of Parks and Recreation, Department of Corrections and Rehabilitation, Military Department, Department of General Services, and the High-Speed Rail Authority.

The text of AB 626 declares that it is intended to ensure contractors are paid in full and in a timely manner for work that is complete and not in dispute. AB 626 represents the Legislature’s response to a perceived problem in the construction industry whereby owners are allowed to delay resolution of change order disputes indefinitely, effectively requiring contractors to finance the cost of disputed extra work during a public work of improvement.

Essentials of the New Claims Procedure: Three Step Process

Step One: Written Claim
AB 626 establishes a mandatory, relatively simple claims procedure to be used by public entities throughout California. The first step of the process is the written claim. Public works contractors are required to submit claims to the public owner by registered mail or certified mail, with return receipt requested. AB 626 defines a "claim" broadly to include a demand for any combination of the following:

  • a time extension, including, without limitation, for relief from damages or penalties for delay assessed by a public entity;
  • payment by the public entity of money or damages arising from work done by, or on behalf of, the contractor pursuant to the contract and payment for which is not otherwise expressly provided or to which the claimant is not otherwise entitled; or
  • payment of an amount that is disputed by the public entity.

Contractors must furnish "reasonable" documentation to support their claim. AB 626 does not specify what documentation is considered "reasonable," and appears to leave that subject to further definition by the public entity in light of the needs of the particular project. Presumably, "reasonable" documentation would include, at a minimum, a time impact analysis for a time extension claim and cost backup for a claim for additional compensation.

Upon receipt of a claim, the public entity must conduct a "reasonable" review of the claim and provide a written statement to the contractor within 45 days identifying which portions of the claim are disputed and which portions are undisputed. However, this 45-day deadline is subject to a number of exceptions:

  • First, the parties may extend the 45-day time period by mutual agreement. AB 626 does not expressly require that such an agreement be in writing, but contractors and public entities would both be well advised to document such agreements to avoid any unnecessary disputes.
  • Second, if a public entity requires the approval of its governing board in order to issue the required written statement and its board does not meet within the 45-day time period, the public entity’s time to respond to the claim is extended until three days after the next regularly noticed meeting of its governing board.
  • Finally, and most importantly, the public entity’s failure to respond to the contractor’s claim within the time periods specified in AB 626 is deemed a rejection of the claim in its entirety. This is consistent with existing law governing the handling of claims against public entities under the Government Code. However, subsequent meet and confer obligations may limit public entities’ incentive to reject contractor claims through inaction, as discussed below.

If any portion of the contractor’s claim is undisputed, then payment on the undisputed portion must be made to the contractor within 60 days after the public entity issues its written statement. Amounts not timely paid to the contractor accrue interest at the rate of 7% per annum.

Step Two: Meet and Confer Conference
If the contractor disputes the public entity’s written statement or the public entity fails to issue a written statement, the contractor may make a written demand for an informal meet and confer conference. Like the initial claim, the demand must be sent by certified mail or registered mail, return receipt requested. Upon receipt of a demand for a meet and confer conference, the public entity must schedule a meet and confer conference to take place within 30 days after receipt of the demand.

Within 10 business days after the meet and confer conference, the public entity must prepare a written statement describing the portions of the claim remaining in dispute and the portions of the claim that are undisputed. If the public entity fails to do so, the claim is deemed rejected in its entirety.

Payment on the undisputed portions of the claim must be made to the contractor within 60 days after the public entity issues its written statement. Again, the public entity’s failure to issue payment within this timeframe subjects it to prompt payment penalties of 7% per annum.

Step Three: Non-Binding Mediation
If the contractor disputes the public entity’s post-conference statement or the public entity fails to issue a written post-conference statement, then the dispute is submitted to non-binding mediation. "Mediation" within the meaning of AB 626 includes any non-binding alternative dispute resolution process, including early neutral evaluation or a dispute resolution board. However, the legislation expressly requires that the contractor and public entity mutually agree on a neutral within 10 business days after the disputed portion of the claim has been identified in writing following the meet and confer conference. AB 626 further stipulates that "[a]ny mediation utilized shall conform to the timelines in this section."

If the parties cannot agree on a mediator or other neutral, each party selects a neutral and those neutrals select a qualified third party to serve as the mediator with respect to the disputed portion of the claim. Each party shall bear the costs of mediation equally.

Mediation under AB 626 excuses any further obligation to mediate under Section 20104.4 of the Public Contract Code, unless the parties agree otherwise in writing. If mediation is unsuccessful, the dispute proceeds to litigation or arbitration in accordance with the parties’ contract and applicable law.

Subcontractor Pass-Through Claims
AB 626 also provides a formalized mechanism for subcontractors of all tiers to assert a pass-through claim through the general contractor who has contracted directly with the public owner. Under the legislation, a subcontractor may request in writing, either for itself or on behalf of a lower-tier contractor, that the general contractor present a claim for work performed by the subcontractor or lower-tier contractor on whose behalf the claim is made. Like claims made directly by the general contractor, a claim asserted by or on behalf of a subcontractor must be supported by "reasonable" documentation. The general contractor must then notify the requesting subcontractor in writing within 45 days whether it presented the claim to the public owner as requested. If the public owner was not presented with the pass-through claim, the general contractor must also provide the subcontractor with a statement of reasons for not having done so.

Impact on Existing Contractual Claims Provisions
The procedure established by AB 626 is largely, but not completely, intended to standardize and replace existing contractual claims procedures used by public entities throughout the state. For all contracts subject to AB 626, public entities will be required to include the text of the legislation or a summary of its requirements. Any attempted waiver of the provisions of AB 626 is declared contrary to public policy and void, with the following two exceptions:

  • First, the parties may agree in writing to waive the mediation requirement and proceed directly to the filing of a civil action or demand for arbitration, but only after the receipt of a claim by the public entity. Thus, once again, AB 626 prohibits pre-dispute modifications of the mediation requirement.
  • Second, a public entity may also prescribe "reasonable" change order, claim, and dispute resolution procedures and requirements in addition to the provisions of AB 626, as long as those contractual provisions do not conflict with or "otherwise impair the timeframes and procedures" set forth in AB 626.

The legislation does not elucidate on the extent of the impairment necessary to run afoul of the limitations on additional change order, claim, and dispute resolution requirements, and the legislative history provides no guidance on that subject.

Implementing AB 626 Requirements
As public entities begin to award contracts that are subject to AB 626, contractors should ensure that their project management is familiar with these dispute resolution requirements. Key project staff should be tasked with this responsibility and trained on the need for a written claim and appropriate documentation to support that claim, as determined by the awarding entity. Contractors should also be mindful of the time requirements specified in AB 626, not only as for their own claims but also for the claims of subcontractors.

Finally, contractors should seek legal advice regarding any claim, change order, or dispute resolution requirements that appear to be in tension with the provisions of AB 626. While AB 626 places an outer limit on the extent of additional procedures that may be imposed by public entities, that boundary is a moving target and will need to be further defined by the courts. Counsel experienced in public works and construction law can assist contractors in identifying potential problems early in the process, before they become more significant issues.

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