Contractor Payment Laws: An Overview
A fundamental principle of California law is that anyone who works on or provides materials for the construction of a building, structure or improvement has a claim to be paid for doing so. If the owner of the property refuses to pay the contractor who did the work on his or her behalf, the contractor has a claim against the owner. If the owner then refuses to pay the contractor because the contractor’s subcontractor has not been paid, the owner then has a claim against the subcontractor for that subcontractor’s work. Everyone in the chain is entitled to be paid in full for their work. If anyone in the chain is not paid, however, the next person in the chain should not lose out as a result of someone else’s failure to pay . Therefore, California has established what are known as Contractor Payment Laws to require owners and contractors to pass through the right for payment to those below them when they claim a right to payment from those above them.
These statutory requirements and rights are known collectively by various terms including: stop payment notice, general contractor stop notice, stop notice, subcontractor stop notice, and 3-day notice. (The contractor or subcontractor who threatens to file a stop payment notice if he or she is not paid is said to have "sent" or "issued" one.) These laws attempt to ensure that each party will timely receive a proper accounting and payment for the work they provided or contracted to be provided on a construction project.
Essential Parts of California Contractor Payment Laws
The California State Legislature has enacted the prompt payment statute to ensure that money is paid in a timely manner from owner, to general contractor, to subcontractors, to lower-tier subcontractors, up to and including the subcontractor and supplier that physically furnished labor or materials to the jobsite. The prompt payment statutes provide requirements for payment applications, retainage, and the timing of each.
Public Contract Code sections 7108.5 and 10262 establish the requirements for retainage. Prior to these statutory enactments, public agencies were able to require retainage as a matter of course, if stated in the contract, regardless of performance issues. Section 7108.5 applies only to private projects, whereas section 10262 applies to state and local public projects. Both sections are similar to one another in that they disallow the retention of more than 5% of the unpaid balance if the contractor is properly licensed at the time of bidding and has been satisfactorily performing. If the contractor is not properly licensed, the retention shall not exceed 10%. In addition, upon completion of 50% of the work, the owner may release the remainder of the retention to the contractor. Upon completion of 100% of the work, the owner is required to release all retention. Furthermore, the owner cannot require additional retention to be withheld for work already completed or materials already supplied.
The state and local governments also adopted Public Contract Code section 8170 to determine when interest accrues on a public agency’s failure to pay for completed work. According to Public Contract Code section 8170(a), "Interest shall begin to accrue with respect to any retention payment commencing 60 days after the date the retention payment became due." This law has been enacted since January 1, 2016, and interest is due at the legal rate of 10 percent per annum.
Payment claims for work performed by a subcontractor or supplier that has not yet been paid by the prime contractor has 25 days after the claimant has submitted a preliminary notice to file its lawsuit to compel the authority to release retention withheld, if any in addition to attorneys’ fees and costs. However, if the notice to withhold payment only pertains to the retention withheld, then the subcontractor and/or supplier then has 30 days after service of the notice to give written notice to the owner or general contractor that an owner or general contractor has improperly withheld retention. The owner or general contractor shall respond to any notice of withholding no later than 15 days after service of the notice. Within 10 days after the service of the response, the contractor or subcontractor must furnish a copy of the complaint to the owner or general contractor.
The Homeowners Bill of Right (HBR) now requires that residential contractors provide homeowners with written notice of their payment timelines. The HBR also requires that the mission statement of the HBR be prominently displayed in the office of the contractor where the services are performed.
Prompt Payment Statutes
The main prompt payment statute, California Civil Code Section 8800-8814, requires that all "persons who contract to have work performed" make "progress payments" based on the "value of the labor, services, equipment, or materials provided." § 8804. This term generally covers contractor, subcontractor and sub-subcontractor payment issues. § 8809 (a). Specifically, when a direct payment is owed to a subcontractor, Section 8804 requires that such payment be made to the subcontractor within fifteen days after the sub-subcontractor submits the proper invoice to the contractor.
Section 8814 provides penalties for the failure to make timely payments to contractors under Section 8804. The first penalty awarded to a contractor is 2.5% of the amount that is due and unpaid at the end of the fifteen-day period. This penalty award is payable to the contractor or subcontractor, as the case may be, after the end of the fifteen day period. Under certain circumstances, if the construction project is "residential, involving the construction of four or fewer units," additional penalties are due. In this case, the contractor is also entitled to 3% per month interest of the amount that is due at the end of the specified time period, as well as court costs and attorney fees incurred in bringing an action to obtain enforcement of the statute. §§ 8810, 8812.
Withholding & Retention
A California contractor may withhold from progress payments a maximum of 10% of the value of the work performed as of the date the payment application is submitted to the owner. In addition to the 10% of the value of the work performed, contractors are permitted to retain 5% of the value of the work performed to account for any defective or uncompleted work.
After a contractor reaches Substantial Completion, it may withhold an additional 5% of the remaining balance as a retention for the completion of all punch list work. Under no circumstances may the total of the withholdings under this statute exceed 15% of the total contract price.
Mechanics Liens & Other Remedies
A common legal remedy by general contractors and subcontractors in California is the right to file a mechanics lien under California Civil Code Sections 3080 et seq. In specific, majority of contractors who furnish labor, materials, services or equipment in connection with work on a property could potentially file a mechanic’s lien for all labor and materials provided. (Civil Code §§ 8400-8490.) Moreover, subcontractors, suppliers, and materialmen may file a bond in the amount of the amount due on the property and thus stop the recording of the mechanics lien.
The mechanics lien must be recorded with the county recorder in the county where the property is located. (Civil Code § 8416(a).) A lien claimant must also give notice of the mechanics’ lien to the owner or reputed owner of the property in which he has filed a mechanic’s lien by sending registered or certified mail to the owner or reputed owner. The notice must indicate that a lien has been filed and specify the date of recording such lien. (Civil Code § 8416(c).)
Further, to avoid excessive use of mechanics liens and resultant financial hardship, California law establishes a statutory time limit for the asserted mechanics lien to be enforced. Specifically, a lien claimant must enforce the mechanics lien within 90 days after filing the lien through a civil action. (Civil Code § 8460.) If the lien is not enforced within this period, the lien is automatically invalidated. (Civil Code § 8460(a).) In fact, a prejudgment lien attaching to a pending court action, known as a "Prejudgment Claim of Right to Sale , " must be perfected within 30 days after a complaint or cross-complaint is filed. (Code of Civil Procedure § 486.010.)
Lawsuits bring with them various risks and costs, including the possibility of incurring significant attorney fees and costs that cannot be recovered once the lawsuit is closed. For those reasons, typically, large general contractors will place a lien on the property before laying out its own money for a job. In addition, general contractors can require its subcontractors and suppliers to place a mechanics lien on the property before it pays the subcontractors and suppliers.
Further, California law provides specific ways to challenge a mechanics lien. Many states afford property owners broad discretion to foreclose mechanics’ liens. However, California does not allow a lien claimant to foreclose a lien against particular property unless the work was performed personally by the claimant, or if the claimant is not an original contractor or original subcontractor, unless the work was performed for the original contractor or first tier subcontractor with whom the person making the claim contracted. (Civ. Code, § 8480.) Moreover, any party who causes a no lien report to be prepared by the appropriate authority, knowing that the report is inaccurate, shall have a lien of at least $1,000.00 on the property. (Civil Code § 8446.) Finally, any claimant that knows or should know that a lien is shown to be excessive shall discharge the excessive portion, which must be done within 21 days of service of notice demand upon the claimant to discharge the excessive portion of the lien. (Civil Code § 8480(c).)
AB 1701
The recently enacted AB 1701, in the form of Labor Code Section 218.7, imposes liability for unpaid wages of a subcontractor’s employees upon the general contractor, unless the complainant or civil action is subject to the jurisdiction of the Unemployment Insurance Appeals Board. A subcontractor’s unpaid wages may be recovered by the employee against the general contractor if the unpaid wage specifically benefits, is to be paid by, or passed through to, the general contractor.
In the case of a private works project, if a contractor fails to pay wages due or otherwise provides workers with required fringe benefits that are incorporated into the contract price for work performed on an original contractor’s behalf, the unpaid wages or fringe benefits shall be a debt immediately due and payable to the employees and their assignees. The unpaid wages or fringe benefits may be recovered from the contractor’s bond, if any, and if the unpaid wages or fringe benefits are not recovered from the bond, then the unpaid wages or fringe benefits may be recovered from the original contractor.
Practices For Contractors To Ensure Prompt Payment
A significant portion of contractors’ resources are tied up in receivables on any given day. Particularly for contractors who perform public works, improper payment procedures can delay payment until after a construction project’s likely completion date. In some instances, when such project is completed, it may be far too late to enforce the mechanics and timely payment provisions in a construction contract or protect a mechanics lien on the project. Unfortunately, as cumbersome as the laws governing contractor progress and retention payments can be, they must be properly understood and utilized to maximize cash flow and protect the contractor’s rights. Developers and owners of commercial and residential projects may also easily succumb to improper payment procedures which jeopardize their rights against a contractor, subcontractor or material supplier.
Contract terms that provide for timely payment require that payment is due within a fixed period of time from the date of a written request for payment. With respect to progress payments, the terms generally specify that the request for payment may be submitted no more frequently than once a month and include supporting documentation indicating the amount of work performed, the state of completion of the work and the amount requested. Such a request also requires the contractor to warrant that all work done and bills paid are in fact paid and what portion has already been paid. This provision is an important protection for contractors, but is also an important protection for owners and developers whose contractors must warrant to them that their subcontractors and material suppliers have received payment and formed a lien. Such a provision provides a full measure of protection for all parties so that no payment is required before work is performed, materials are delivered or labor is provided.
A stopple notice provision requires that a contractor or subcontractor provide a written notice to a developer or owner of a project prior to submission of an invoice. Such notice usually sets forth the amount of money sought for payment under the invoice, the amount of the invoice already paid, if any, and the unpaid amount. The benefit of such a provision is twofold. First, the project owner knows precisely how much money is owed to the contractor. Second, the contractor need not wait for sixty days to file a mechanics lien if payment is not made and it has complied with the timing requirements in the construction contract. The second benefit is not universally desirable for all contractors in all circumstances. Filing a contracting mechanics lien is a procedure that is intended to coerce payment by the owners, and have lien rights associated with that coercion. Stand-alone issues over the amount of a mechanics lien that is equitable to the contractor and enter into a court ordered process to fix the lien amount, can be avoided by contractual provisions for contracting lien waiver security with the owner or developer.
The Notice of Completion ("NOC") is required to be filed in the county recorder’s office by a project owner when the project is finished. The NOC is recorded within ten (10) days of the commencement of the contract’s final work, which is either a physical touch on the property or the end of a contract by which the contracting party agreed to complete the project. The NOC initiates the forty-five (45) day period during which a Notice of Mechanics Lien can be filed.
Conclusion & Resources
In conclusion, California contractor payment laws cover a number of important areas, including prompt payments of progress billings, retention practices, and the mechanics lien. By understanding their rights under these laws, contractors can protect themselves from delayed payments that can impact their ability to complete the job.
If you want to learn more about California contractor payment laws, there are a number of helpful resources available . The California Contractors State License Board provides a helpful overview of contractor payment laws on its website. The American Subcontractors Association also has a comprehensive resource center on liens and bonds. Finally, if you have any questions or concerns about contractor payment laws in California, Regina Stanger, a contractor attorney in California, can provide you with the legal guidance you need to ensure you are paid on time and in full.