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PRESS RELEASE

Daily Pacific Builder

CEA’s “Owner Security” Bill Will Protect Industry

October 15, 2001

The Construction Employers’ Association (CEA) today announced that Governor Davis signed CEA sponsored Assembly Bill 1534 which will help to ensure that general contractors, subcontractors, and construction workers are paid in the event of a project owner default.

“AB 1534 is an equitable bill which will effectively address a serious threat to the stability of the California construction industry. In these times of economic uncertainty, the bill provides a significant level of protection for general contractors from being severely financially impacted or even forced into bankruptcy due to an owner default.” said Michael Walton, Secretary of the Construction Employers’ Association

The bill was introduced by CEA in response to the 1997 California Supreme Court ruling in the case of Clarke v. Safeco, mandating that contractors must pay subcontractors even if the owner of a project defaults on their agreement with the contractor. This ruling greatly escalated the financial risks of general contractors by effectively setting them up as the guarantor of a construction owner's financial obligations. Under Clarke vs. Safeco, the general contractor is still obligated to pay its subcontractors without having any ability to collect money directly from a defaulting owner for work performed and accepted.

The provisions of AB 1534 will become effective January 1, 2002, requiring that owners of construction projects with a contract value of over $5 million (or over $1 million in some cases) must provide financial security for the project by one of several methods. It does not apply to single family residences or public works projects.

Owners will be required to provide either a payment bond in the amount of 15% of the project value, an irrevocable letter of credit in the amount of 15% of the project value, or a 15% escrow account to be used by the contractor and owner only in the case of default. For tenant improvement construction projects of less than six month's duration and over $1 million in value, the security required to be provided by a construction owner is 25% of the project value for the three options listed above.

AB 1534 had widespread support from the construction industry, including organized labor and the major subcontracting associations. These entities recognized that if a project owner defaults, general contractors, subcontractors and construction workers could be financially devastated.

“For four years we have worked with a variety of construction industry organizations to craft a balanced bill that would constructively address the growing problem of owner defaults. In particular, we want to thank the California Building Industry Association and the Building Owners and Managers Association for their willingness to negotiate the terms of the bill with us.” comments CEA’s legislative advocate Jerry Zanelli.

“AB 1534 represents a huge step in ensuring that labor and material suppliers on private construction projects will have some financial security that they will get paid for all that they are due and will not be left high and dry by a defaulted LLC developer or bankrupt tenant. That was the spirit of the landmark 1997 State Supreme Court Decision, Clark vs. Safeco,” said Charlie Kuffner, Senior Vice President for Swinerton Builders.