AB 626 adds new Public Contract Code section 9204. It creates a new claims resolution procedure in addition to those already found in the Public Contract Code sections 10240 to 10240.13 (state public works arbitration) and 20104 to 20104.6 (claims against local agencies under $375,000 unless agency has elected to arbitrate under section 10240, et seq.). It applies to contractor claims on all public works projects, except for projects of the following Departments: Water Resources, Transportation, Parks and Recreation, Corrections and Rehabilitation, Military, General Services, and the High-Speed Rail Authority. This section becomes effective for contracts entered after January 1, 2017 and expires December 31, 2019 unless renewed. The public entity must include these provisions or a summary of them in each project’s plans or specifications. Any waiver of these provisions is void, however, public entities may add requirements for change orders, claims, and dispute resolution that do not conflict with these provisions. The parties also may agree in writing to avoid mediation and proceed immediately to arbitration or litigation.

More Good than Harm?

This bill is hailed by its sponsor, United Contractors, as:

In a historic win for industry, today, Governor Brown signed AB 626, UCON’s “change order” reform legislation. This victory comes after a three-year battle to close the loop-hole in prompt payment by public agencies for CA contractors.

The UCON-sponsored measure implements a fair and responsible process that requires local agencies, including the UC/CSU system and Airports, to respond to a contractor’s claim for “extra work” timely, pay the undisputed portions of claims and provides a path for expedited settlement of disputed claims.

This is a major victory for California’s public-works contractors.

United Contractors’ enthusiasm may be misplaced. Instead of amending existing law addressing the same issues, AB 626 engrafts a new scheme on top of them. How the old and new provisions interact is far from clear (please see attached table of provisions and timing of overlapping dispute resolution events), and while it is possible the new law will do more good than harm, significant concerns remain, and trade contractors need to be wary of potential traps in handling claims. Concerns for contractors include:

    • These dispute resolution procedures potentially raise traps for the unwary:
      • It is possible that the entity’s written decision--or expiration of its time to respond thereby rejecting part a claim--triggers the 90-day period in which to initiate arbitration under PCC section 10240.1, yet that 90-day period may expire before mediation takes place under section 9204;
      • It is possible that the entity’s written decision--or expiration of its time to respond thereby rejecting part of a claim--triggers the 1-year period in which to initiate a government claim under arbitration under PCC section 10240.1, yet that 1-year period may expire before mediation takes place under section 9204;
    • This new law provides for new, expensive hoops for contractors to jump through, before they initiate arbitration or litigation, with no assurance of receiving any earlier payment;
    • Contractors gamble by undertaking these dispute resolution procedures, because an uncooperative public entity could use them to drag out resolving the claim:
      • Contractors disputing an entity’s decision on a claim may request an informal settlement conference, yet an uncooperative public entity is free to stonewall and offer nothing at this conference;
      • If the matter is not resolved by the informal settlement conference, the contractor may request mediation, but section 9204 does not set a time by which mediation must take place;
    • While public entities are supposed to pay undisputed amounts (after 105 days following claim presentation, or later if the public entity’s board must meet to decide), the penalty for failing to make payment is only a 7% interest charge, and no attorney fees for having to chase recovery;
    • Trade contractors gain no rights under this section, except that a general contractor must tell the trade contractor, within 45 days after the trade contractor presents its claim in writing to the general contractor, whether the general contractor presented the trade contractor’s claim to the public entity and if not, why not. Trade contractors’ claims are subject to the concerns above—including having to pay for the process, without ability to control the process, since general contractors usually retain control by contract.

Conclusion

New PCC section 9204 may well benefit a substantial number of contractors in the State of California by creating a new mechanism to bring public construction parties to the negotiating table to discuss extra work and other claims. However, the new section puts new tools in the hands of uncooperative public entities to use to delay claim resolution and erode the resolve of contractors who must carry the cost of labor and materials for such claims work. Of more concern is the possibility that contractors may discover their right to arbitrate or litigate time-barred if they use the new dispute resolution procedures.

Event under New PCC 9204, combined with PCC 10240 or 20104 et seq. or Gov. Code section 911.2

Potential Days Post-Claim

Explanation of Timing

Contractor initiates claim by certified or registered mail; Contractor must provide reasonable documentation to support the claim.

0

Not specified. Contract notice provisions must be followed.

Subcontractor may present its own or sub tier’s claim to contractor; Subcontractor must provide reasonable documentation to support the claim. Within 45 days, contractor must inform subcontractor in writing whether contractor submitted subcontractor’s claim to the public entity, and if not, why not.

0

Not specified. Contract notice provisions must be followed.

Under PCC 20104.2, claimant must initiate claim against local agency in writing and include documents necessary to substantiate the claim.

Variable

On or before date of final payment (subject to contract notice provisions)

Under PCC 20104.2, local agency may require additional documentation from claimant.

Within

30

Within 30 days of receipt of claim

Under PCC 20104.2, local agency must respond in writing.

45

or more

Within 45 days of receipt of claim, or within 15 days following receipt of additional documentation, for claims under $50,000

PCC 9204(d)(1). Public entity must conduct reasonable review and provide the claimant a written statement identifying what portion of the claim is disputed and what portion is undisputed. The entity’s failure to respond timely deems claim denied, without determination of merits.

45

or more

Within (1) 45 days following receipt of claim or (2) time extended by agreement or (3) within 3 days following meeting of entity’s governing board following 45 days or time as extended, if board approval is required

PCC 9204(d)(1)(D)(2)(A). Claimant may by certified or registered mail request an informal meet and confirm settlement conference for issues in dispute.

45

or more

Following written statement or expiration of allowed time

Under PCC 20104.2, local agency must respond to claim in writing.

60

or more

Within 60 days of receipt of claim, or 30 days following receipt of additional documentation, for claims over $50,000 and under $375,000

PCC 20104.2(d). Claimant may demand in writing informal conference with local agency to meet and confer for settlement of the issues in dispute.

75

or more

Within 15 days following written response to claim or expiration of time

PCC 9204(d)(1)(D)(2)(A). Public entity must schedule conference.

75

or more

Within 30 days of request for informal meet and confer settlement conference. Must conference take place within 30 days of request, or must agreement to a future date be reached within 30 days of request?

PCC 20104.2(d). Public entity must schedule conference.

90

or more

Within 30 days of request for informal settlement conference. Must conference take place within 30 days of request, or must agreement to a future date be reached within 30 days of request?

PCC 9204(d)(1)(D)(2)(B). Public entity must provide written statement identifying what portion of the claim remains in dispute and is undisputed.

100

or more

Within 10 days following meet and confer settlement conference

PCC 9204(d)(1)(D)(2)(B). Claimant may demand mediation with public entity.

100

or more

Following written statement following initial review or expiration of allowed time

PCC 9204(d)(1)(D). Public entity must issue payment on undisputed amount. Entity’s failure to pay timely deems claim denied, without determination of merits. (PCC 9204(d)(1)(D)(3).) Amounts not paid timely shall bear interest at 7 percent per annum.

105

or more

Within 60 days following issuance of written statement after initial review

PCC 9204(d)(1)(D)(2)(B). Public entity and claimant must agree to a mediator. If parties cannot agree, their appointed mediators meet and confer to select a third mediator. Mediation held satisfies mediation requirement of section 20104.4.

110

or more

Within 10 days following demand for mediation

Claimant on state project must initiate arbitration under section 10240.1.

135

or more

Within 90 days following “final written decision on the claim.” Under section 10240.1, is “final written decision” the written decision by the entity required under PCC 9204? Does 90-day period for initiating arbitration start to run after such written statement? Does 90 days start to run after 45 days has elapsed with no decision by the public entity?

PCC 9204(d)(1)(D)(2)(B) and PCC 9204(d)(1)(D)(3)-(4). Public entity must issue payment on undisputed amount. Entity’s failure to pay timely deems claim denied, without determination of merits. Amounts not paid timely shall bear interest at 7 percent per annum.

160

or more

Within 60 days following issuance of written statement after meet and confer settlement conference

Under PCC 20104.2(e) and Gov. Code section 911.2, claimant must present written claim to Department of General Services within 1 year of accrual of the cause of action. The “date of the accrual of a cause of action to which a claim relates is the date upon which the cause of action would be deemed to have accrued within the meaning of the statute of limitations which would be applicable thereto if there were no requirement that a claim be presented to and be acted upon by the public entity before an action could be commenced thereon.”

1 year

and 45 days

Within 1 year after accrual of cause of action, tolled by meet and confer process in 20104.2(d). Does the cause of action under PCC 20104.2(e) accrue upon issuance of the “written statement” or expiration of time for decision, thereby triggering the 1-year period for bringing a government claim? Does the meet and confer process under PCC 9204 toll time to bring claim as it does under PCC 20104.2(e)?

PCC 9204(d)(1)(D)(2)(B). Public entity and claimant participate in mediation.

Indefinite

Not specified

PCC 9204(d)(1)(D)(2)(E). Public entity and claimant proceed to arbitration or litigation.

If matter not resolved by mediation

PCC 20104.4. Court to submit local agency matter to mediation.

Between 30 and 60 days following filing of a civil action

PCC 20104.4. Local agency and plaintiff to select mediator.

Within 15 days following order to mediate or later by agreement

PCC 20104.4. Local agency and plaintiff to participate in mediation.

Within 30 days following order to mediate or later by agreement

PCC 20104.4. Mediation between local agency and plaintiff to be concluded.

Within 15 days of commencement of mediation or later by court order or agreement

PCC 20104.4. Local agency and plaintiff proceed to arbitration or litigation.

Not specified