California’s prompt payment laws serve the important function of encouraging timely and orderly payment for work on construction projects. They impose statutory deadlines by which project owners must pay general contractors (who in turn must pay subcontractors and so on) or face exorbitant penalties. However, they have become increasingly confusing. Prompt payment statutes span the Business and Professions Code, Public Contracts Code, and Civil Code and their applicability varies depending on the type of project, the type of payment (i.e. progress payment or retention), and the identity of the payor (owner, public entity, direct contractor, etc.). As such, any opinions offering clarity to the interpretation of these statutes are welcomed with open arms.
Blois Construction, Inc. v. FCI/Fluor/Parsons (245 Cal.App.4th 1091) offers, albeit in a limited way, such clarity, particularly regarding retention payments. The decision is timely in an age where sophisticated commercial contractors negotiate for terms that reduce or eliminate retention amounts as projects near completion (the argument being that since costs decrease as completion approaches, and since owners can rely on the accumulation of previous retentions, additional security is unnecessary). Even the California State Legislature followed this retention-reduction trend by instituting a 5% cap on retention for public works projects.
Brief Summary of Public Contract Code §7107
Section 7107 of the Public Contract Code requires public entities to release retention proceeds to contractors within 60 days of completion of a project. Pub. Contract Code §7107(c). The original contractor must pay its subcontractor(s) their share of the retention received within seven days of receipt, or face penalties of 2% per month of the improperly withheld amount. Pub. Contract Code §7107(d) and (f).
Blois Construction Summary
In 2006, the Exposition Metro line Construction Authority (“Metro” or “owner”) contracted with defendant FCI/Fluor/Parsons (“FCI” or “general contractor”) to serve as general contractor of Metro’s light rail line (the “Project”). Id.at 1094. FCI contracted with plaintiff Blois Construction, Inc. (“BCI” or “sub-contractor”) to perform underground work. Id. Both the primary contract (between Metro and FCI) and the subcontract (between FCI and BCI) contained provisions allowing retention of 10% of payments owed to FCI and BCI respectively. Id. An additional provision in the primary contract allowed Metro to elect not to take further retentions from remaining progress payments after 50% of the work on the project had been completed, and if it determines that FCI’s work was satisfactory. Id.
Pursuant to FCI’s request, Expo stopped retaining portions of progress payments beginning in December 7, 2009. However, Expo held the retention funds that accumulated from prior progress payments. Id.
Over the course of the Project FCI withheld over $500,000 in retention. Id. BCI sued FCI, alleging non-payment for 1) extra work performed on the Project, and 2) withheld retentions. Id. FCI agreed to pay the full amount of withheld retentions, but disputed BCI’s entitlement to late payment penalties under Public Contract Code §7107(f). Id.at 1095.
The appellate court ruled that Metro’s decision to stop withholding future retentions did not equate to payments of past retentions under §7107. Id. Therefore, since FCI did not receive retention proceeds from Metro until 2014, months after paying BCI its retention amounts in full, BCI was not entitled to penalties under §7107(f). Id.at 1096.
The court reasoned that BCI wrongly interpreted “retention proceeds” to include any amount that Metro could withhold from FCI, regardless of whether it actually did so. Id. Such an interpretation contradicts the statutory language of §7107, which applies only to withheld payment amounts. Id. Since Metro stopped withholding retention from progress payments in late 2009 onward, §7107 did not apply to those payments. Id.
BCI argued that the court’s conclusion contradicted the statute’s purpose of ensuring timely payment by general contractors to subcontractors. Id. The court stated that §7107 and other prompt payment statutes merely ensure that subcontractors do not wait significantly longer than general contractors for their share of the proceeds. Id.at 1097. An interpretation supporting earlier payment would unfairly prejudice general contractors, who often wait years before receiving withheld retentions from owners. Id. When Metro ceased withholding retention, FCI began paying BCI the full amount to which it was entitled from each progress payment, without retaining any funds. At no point did FCI receive payments without distributing BCI’s share of the proceeds. Id. Since FCI’s payments were timely, BCI could not succeed on its claims for additional penalty amounts. Id.
The court’s ruling falls in line with the prompt payment laws’ intent to ensure orderly and time-appropriate payment, and applies its interpretation broadly, offering clarity to all prompt payment statutes. The judgment obviously favors all “upstream” contractors, and will likely stoke the trend towards retention-reduction. What then, is to be gleaned from this case? Namely, if general contractors (or other upstream contractors) seek to modify retention withholdings, they should clearly identify and record their payments as non-retention progress payments to avoid confusion and dispute.