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AB 2216 aimed at improving subcontractors' cash flow, reducing bond claims

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General contractors will have seven days after receiving payment on a project to pay out subcontractors, if a bill before the state Senate is passed.

Assembly Bill 2216 is aimed at improving subcontractors’ cash flow by reducing the time general contractors have to pay subcontractors from 10 days to seven on both public and private projects. Authored by Assembly member Felipe Fuentes (D -- San Fernando), the legislation also clarifies the way in which subcontractors and materials suppliers may place liens on construction projects.

AB 2216 cleared the state Assembly with bipartisan support in May, and has been passed on to the Senate for consideration.

Cash flow is an important issue for subcontractors in the construction industry, most of which are small businesses. Contractors and subcontractors are paid after a project is completed and must finance labor, materials and overhead costs, including insurance during the construction process, said Andrew Berg, executive manager of the National Electrical Contractors Association, San Diego Chapter. NECA co-sponsored the legislation.

“Cash flow is everything in our business,” Berg said. “More contractors go out of business due to cash flow than anything else.”

The legislation will also require subcontractors make claims against the bond before, or at the time the general contractor files a notice of completion.

Current law makes general contractors responsible for bond claims by subcontractors or materials suppliers hired by their subcontractors. General contractors pay first-tier subcontractors believing they will, in turn pay their second-tier subcontractors or materials suppliers. General contractors often have no way of knowing whether second-tier subcontractors have been paid, despite bearing legal responsibility.

Under current law, subcontractors must give 20-day notice before a project is completed, stating that they have not been paid. However, if a subcontractor fails to file the notice, it may still file a bond claim up to 75 days after completion of the project.

The change in timing will allow general contractors to instruct their subcontractors to pay second-tier subcontractors.

“The current law creates an inequity for the general contractor,” stated Paul Gladfelty, a legislative advocate for the Associated General Contractors of America in a letter of support for the legislation.

Not all members of the construction industry support the legislation. The American Subcontractors Association California Inc. opposes the elimination of the 75-day grace period in which subcontractors may file bond claims.

“This is a huge problem because subcontractors, particularly early finishing trades, have no way of knowing when the project will be complete and whether the project is actually complete,” the group writes.

The same changes to subcontractor payment requirements were proposed last year under AB 396. That bill was held in Assembly Appropriations Committee because it included a provision that reduced retentions on public works projects to 5 percent, which would have added costs to such projects.

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