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The Project “Completion” Paradox in California

We’ve written before about why the date of “completion” on a California construction project is important, and why, if I may be blunt, determining that date can be as frustrating as a one-legged man in a game of kickass.

You see, in California the deadline to record a mechanics lien, serve a stop payment notice, or make a payment bond claim – important construction payment remedies the California State Legislature saw fit to help you get paid – often depends on when a project is “completed.” So, for example, the deadline for direct contractors to record a mechanics lien is 90 days from completion of the project.

But what constitutes “completion”?

The “Completion” Paradox

For private works projects, Civil Code section 8180 provides that “completion of a work of improvement occurs upon the occurrence of any of the following events”:

1. Actual completion of the work of improvement;
2. Occupation or use by the owner accompanied by cessation of labor;
3. Cessation of labor for a continuous period of 60 days;
4. Recordation of a notice of cessation after cessation of labor for a continuous period of 30 days; or
5. If a work of improvement is subject to acceptance by a public entity, completion occurs on acceptance.

For public works projects, Civil Code section 9200 provides that “completion of a work of improvement occurs at the earliest of the following times”:

1. Acceptance of the work of improvement by the public entity; or
2. Cessation of labor on the work of improvement for a continuous period of 60 days.

But the definitions themselves raise further questions:

– What is “actual completion”? Is it receipt of O&M manuals and warranties? Is it receipt of a final pay application? Is it the owner saying “yup, you’re done”?
– What is “occupancy or use”? Is it turning on the utilities? Watering the landscape? Moving furniture in? Or do people have to be using the facility for its intended purpose?
– What is “cessation of labor”? Does in only include physical labor at the site? How about work performed off site? How about work performed at the office?
– What is “acceptance by a public entity”? Is it receipt sign off by the building department? Is it receipt of a certificate of occupancy? Or is it something else?

And therein lies the paradox. The definitions need definitions.

Picerne Construction Corp. v. Castellino Villas

The next case – Picerne Construction Corp. v. Castellino Villas, California Court of Appeals for the Third District, Case No. C071197 (February 18, 2016) – highlights the difficulties in determining when project completion occurs.

Note: Picerne involved the predecessor statute to Civil Code section 8180 – Civil Code section 3086 – but it is still instructive of the disagreements which can arise over the definition of “completion.”

General contractor Picerne Construction Corp. (“Picerne”) entered into a construction contract with Castellino Villas (“Castellino”) for the construction of an apartment complex in Elk Grove, California (“Project”). The Project consisted of 11 apartment buildings, separate garages, a clubhouse and other facilities.

The case mentions a few important dates:

The City of Elk Grove issued several certificates of occupancy, the first of which was issued on May 3, 2006, and the last of which was issued on July 25, 2006. Picerne and several of its subcontractors, however, continued to work on the Project after July 25, 2005. This included straightening out some of the valleys in the roofs, installing nailers and hips on the roof ridges, and nailing trim.
– On August 28, 2006, Castellino signed a document accepting buildings 1, 3, 4 and 6 through 11 as being complete. At the time, Picerne was still completing punch list work on buildings 2 and 5, including the installation of grip tape on stair treads.
– On September 8, 2006, Castellino issued a document entitled “Owner’s Acceptance of Site” and Castellino began renting apartments in October 2006.
– On November 28, 2006, Picerne recorded a mechanics lien against Castellino after it was not paid its retention. Later, on December 29, 2006, Picerne filed suit to foreclose on its mechanics lien.
– On April 30, 2007, Picerne recorded a notice of completion stating that the Project was completed on April 20, 2007.

Following trial, the trial court entered judgment in favor of Picerne and ordered that the property be sold to satisfy Picerne’s mechanics lien. Castellino appealed.

The Court of Appeals Decision

On appeal, Castellino argued that Picerne had not timely recorded its mechanics lien because Picerne did not record its mechanics lien within 90 days of “substantial completion” of the Project, which it argued was the date the City of Elk Grove issued its final certificate of occupancy, on July 25, 2006.

At the time, former Civil Code section 3115 provided:

Each original contractor, in order to enforce a lien, must record his claim of lien after he completes his contract and before the expiration of (a) 90 days after the completion of the work of improvement as defined in Section 3106 if no notice of completion or notice of cessation [of labor] has been recorded, or (b) 30 days after recordation of a notice of completion or notice of cessation [of labor]. (Emphasis added).

Former Civil Code section 3106 in turn provided:

“Completion” means, in the case of any work of improvement other than a public work, actual completion of the work of improvement. Any of the following shall be deemed equivalent to a completion:

(a) The occupation or use of a work of improvement by the owner, or his agent, accompanied by cessation of labor thereon.

(b) The acceptance by the owner, or his agent, of the work of improvement.

(c) After the commencement of a work of improvement, a cessation of labor thereon for a continuous period of 60 days, or a cessation of labor thereon for a continuous period of 30 days or more if the owner files for record a notice of cessation. (Emphasis added).

Note: Current Civil Code section 8180, which went into effect on July 1, 2012, eliminated the “acceptance by an owner” trigger of “completion.”

In support of its argument, Castellino argued that cases construing the predecessor statute to Civil Code section 3115, Code of Civil Procedure section 1187, had held that “any trivial imperfection in the said work, or in the construction of any building, improvement, or structure, or of the alteration, addition to, or repair thereof, shall not be deemed such a lack of completion as to prevent the filing of any lien.” And, here, argued Castellino, after the City of Elk Grove issued its final certificate of occupancy on July 25, 2006, only minor, trivial work (i.e., the roof work and installation of grip tape on the stair treads ) was left to be completed by Picerne.

The Court of Appeals disagreed. Civil Code section 3106 defines “completion” as “actual completion” not “substantial completion,” held the Court, and:

As we have explained, the mechanic’s lien statute is intended to inure primarily to the benefit of persons who perform labor or furnish materials for works of improvement, and it is to be liberally construed for the protection of laborers and material suppliers, with doubts concerning the meaning of the statute generally resolved in favor of the lien claimant. Interpreting completion as actual completion gives lien claimants the maximum amount of time to assert their rights before such rights are cut off, whereas interpreting completion as substantial completion could cut off mechanic’s lien rights much earlier.

And here, explained the Court of Appeals: (1) Picerne was installing grip tape on the stair treads after July 25, 2006, which was original contract work not merely corrective or repair work; and (2) the roofing work performed after July 25, 2006 could not be warranty work because Castellino did not begin renting the apartments until October 2006. In short, explained the Court, “the roof and stairway work performed after July 25, 2006, is not comparable to adding a few strokes of paint or turning a screw.”

The Take Away

There are a few take-aways from Picerne:

What constitutes “completion” for purposes of determining deadlines under the construction payment remedy statutes is often unclear. This is true both under the former statute as well as the current statute.
Determining when “completion” occurred is often extremely fact dependent, requiring parties to show among other things what work was included in the original contract; whether the work performed was uncompleted contract work or merely corrective, repair, or warranty work; and, as seems suggested by the Court of Appeals with its “few strokes of paint or turning a screw” comment, the substance of the work performed.
When there’s doubt, given that California’s construction payment remedy statutes are “liberally construed for the laborers and material suppliers,” doubts will generally be resolved in favor of the claimant.

By Garret Murai: https://calconstructionlawblog.com/2016/03/28/the-project-completion-paradox-in-california/

Filed under: Construction,Surety Quarterly — Jillian Bender-Cormier @ 6:01 pm May 12, 2016


Construction Payment Remedies: You May be Able to Skate by, But Why?

My grandfather used to say that “anything worth doing, is worth doing well.”

It wasn’t until later that I learned the quote wasn’t his, but a quote from Philip Stanhope the Fourth Earl of Chesterfield, who said in his posthumously published and quite lengthily titled Letters to His Son on the Art of Becoming a Man of the World and a Gentleman, that “whatever is worth doing at all, is worth doing well.” I’m not sure where my grandfather, who wasn’t a man of letters, picked up this quote, but I like his version better.

While “anything worth doing, is worth doing well” can be said to apply to a wide variety of things in life, including living itself, it applies equally to the world of construction payment remedies, which have requirements that are both detailed and deadline driven. (more…)

Filed under: Construction,Surety Quarterly — Jillian Bender-Cormier @ 5:53 pm


Contractor Safety: Are You Responsible When They Are on Site?

Dealing with contractors on site who don’t adhere to your safety procedures can be risky. Since you or your employer can be subject to fines or even jail time when not compliant with regulations, you need to know who is accountable for your contractors.

Countries have different rules and regulations when it comes to safety and training for contracted companies and lone workers.

Globally, the International Labour Organization (ILO) reports that “although there are no ILO instruments that specifically address contractors’ and subcontractors’ safety and health at work (or for training in the industry), those concerning occupational safety and health (OSH) in general emphasize the importance of OSH training for all workers. Safety training should focus on supporting preventive action and finding practical solutions.”

While there are no specific global requirements, we will explore contractor safety regulations for the construction industry in the United States.

United States
OSHA offers safety and health regulations for construction. According to the regulations for construction, “in no case shall the prime contractor be relieved of overall responsibility for compliance with the requirements of this part for all work to be performed under the contract.”

Workers in the engineering and construction industries face many hazards, as construction sites are one of the most dangerous places to work in the world, especially for contracted lone workers.
OSHA also indicates that “to the extent that a subcontractor of any tier agrees to perform any part of the contract, he also assumes responsibility for complying with the standards in this part with respect to that part… [W]ith respect to subcontracted work, the prime contractor and any subcontractor or subcontractors shall be deemed to have joint responsibility.”

In 2013, OSHA noted that 20 percent of occupational fatalities were in construction. Every month, the agency reports fatalities of contract workers, and often, publicizes citations and fines for both host companies and the employers of contract employees if they are killed or injured or endangered on the job.

The Safety Landscape is Evolving: Are you Prepared?
In the United Kingdom and Australia, the governments have implemented legislation that requires the employers to be responsible for the safety and well being of their contractors. Canada and the United States still have some work to do so that contractor responsibility is clear for both employers and contractors.

Is your organization up-to-date on local and regional legislation? Is this information effectively communicated – specifically to your lone workers? And are your current safety investments compliant?

Filed under: Blog,Construction,Safety,Surety Monthly — Jillian Bender-Cormier @ 12:22 am November 25, 2015


Subcontractor Bonding: What General Contractors and Subcontractors Need to Know

With project owners and general contractors becoming more risk averse, bonding subcontracts has become more prevalent than ever. Decades ago, many sureties viewed bonding subcontractors as more risky than bonding prime contractors.

Today, most sureties do an excellent job of mitigating their exposure to the unique risks within the subcontract market. As a result, there is increased surety appetite and capacity to bond subcontractors.

While subcontracts contain unique risks, the surety looks for the same basic qualities in a subcontractor as they do in a prime contractor: capacity, capital and character. The surety pays close attention to receivables and will want to see an aging schedule. It is helpful if the subcontractor has experience working for the general contractor and has established a good relationship.

Why Are Subcontractor Bonds Required?
Unlike prime contracts, bonds typically are not required for subcontracts by law on public works. Instead, each general contractor decides whether to require their subcontractors to bond. Prudent general contractors understand the importance of transferring the risk of subcontractor failure by establishing a subcontractor bond policy. The general rule of thumb is a subcontract exceeding $100,000 will require a bond; however, a general contractor can make this threshold smaller or larger, depending on the scope of the subcontractor’s work and the type of project. Chances are, subcontractors doing more than $100,000 on public work will eventually encounter a bond requirement.

Bid vs. Negotiated
Because subcontracts are usually negotiated, general contractors seldom require bid bonds. Instead, the general contractor may require a bond prequalification letter from its surety that states the subcontractor’s current bond capacity. However, there is a growing trend for large general contractors to require bid bonds. A subcontractor must be fully prequalified by the surety before obtaining either a bond letter or a bid bond.

The Devil is in the Details
General contractors try to shift as much project risk to their subcontractors as possible. Typically, the general contractor uses its own, customized subcontracts and bond forms. The surety will require the subcontractor to provide a copy of the subcontract and bond forms prior to approving the bond. The surety wants to make sure there are no unduly onerous terms and conditions for the subcontractor–and to them, by extension.

Here are a few examples of common subcontract clauses that sureties consider onerous.

Extended discovery period.
A general contractor should make a bond claim reasonably soon after it is discovered. An extended discovery period clause allows the general contractor to wait several years before filing bond claims or lawsuits against the subcontractor and its surety. Sureties usually take strong objection to this condition.
No notice required. Often, subcontracts are amended as the work progresses. The surety may object to a subcontract that does not require the general contractor to notify the surety of contract changes that can significantly increase their liability. Sometimes, the subcontract language even allows the general contractor to default the subcontractor without notice. This can leave the door wide open for an unscrupulous general contractor to default and replace the subcontractor without giving the subcontractor and its surety a chance to cure the problem. If given proper notification, the surety can be helpful in defusing contentious disputes that might otherwise result in costly litigation.
Pass-through liquidated damages. On large, high-profile projects, the liquidated damages assessed by the project owner in the event of a project delay can be substantial. For example, the liquidated damages for a $100 million project might be $50,000 per day. Most boilerplate subcontracts simply pass down the liquidated damages from the prime contract to the subcontractor. The surety will want to know the specific amount of liquidated damages and how much time the subcontractor is given to complete the work. Sureties will object to contract wording that allows the subcontractor to be charged with all the liquidated damages, regardless of who is responsible for the delay. The liquidated damages should be allocated proportionally to the amount of fault the subcontractor bears.
Pay when paid. This clause has gained wide acceptance in recent years. It legally allows the general contractor to only pay the subcontractor after they have received payment from the project owner.
Pay if paid. This is a newer twist to the pay when paid clause that allows the general contractor to be only legally liable to pay the subcontractor if the project owner pays the general contractor. The subcontractor is given legal remedies if this clause is enforced; however, specific actions must be taken that will require assistance from a good construction attorney. This is an especially dangerous condition for the subcontractor and may be difficult to bond.

Eager to take on new work, subcontractors often make the mistake of signing subcontracts without fully understanding the ramifications of its terms and conditions. Smaller subcontractors often view seeking legal advice as cost prohibitive. It is far less expensive to have an attorney review and negotiate a subcontract’s wording than it is to hire the attorney after construction starts and a dispute erupts into a costly, protracted legal fight. Most general contractors are willing to modify or even eliminate objectionable conditions.

Bond Before Starting Work

Sometimes, the general contractor allows the subcontract to begin work without the bond in place. It may be tempting for the subcontractor to start the job and worry about the bond later, but it is never a good idea. If the bond is required in the subcontract, it will be enforced eventually. Once the work starts, the surety will demand written confirmation from the general contractor that the there are no pre-existing performance or payment issues on the job. General contractors tend to recoil against this, often sending the request to their legal department. Meanwhile, the bond approval is kept in limbo, with the general contractor and surety locked in a stalemate. The general contractor may lose patience and refuse to pay the subcontractor. They can even default and replace the subcontractor for failure to provide the bond.

With a growing number of general contractors requiring subcontractor bonds, it is important for subcontractors to be prepared. To be successful, a subcontractor must enter into a subcontract with equal measures of enthusiasm and caution.

Source: http://enewsletters.constructionexec.com/riskmanagement/2015/04/subcontractor-bonding-what-general-contractors-and-subcontractors-need-to-know/

Filed under: Construction,Surety Monthly — Jillian Bender-Cormier @ 10:49 pm October 26, 2015


Construction Material Prices Plunge in September

Prices for inputs to construction industries plunged 1.6 percent in September after shedding 0.9 percent in August, the Bureau of Labor Statistics reported today. Year-over-year prices were down 5.3 percent for the month, the largest yearly decrease since October of 2009. Inputs to nonresidential construction prices also declined, losing 1.6 percent for the month and 6 percent for the year. Only three of the 11 key input prices expanded on a monthly basis in September, while six experienced double-digit year-over-year declines, according to analysis by Associated Builders and Contractors.

“The global economy has continued to soften in recent weeks, with additional concerns directed at formerly fast-growing nations like China, Brazil and Russia,” said ABC Chief Economist Anirban Basu. “Europe continues to muddle along and the Canadian economy remains relatively flat. All of this has conspired to weaken demand for global commodities even as supply of many inputs continues to be elevated.

“For much of September, there was a belief among some that the Federal Reserve would raise short-term interest rates during that month,” said Basu. “That belief helped keep the dollar strong, which also helped to keep commodity prices low. When the Fed made the decision not to raise rates, the dollar weakened a bit, allowing oil prices to edge higher. The implication is that October PPI is unlikely to be as deflationary as September.”

Only three key input prices rose in September:
• Plumbing fixtures and fittings expanded 0.1 percent from August and are up 1.1 percent from September 2014.
• Prices for concrete products expanded 0.7 percent in September and are up 3 percent from the same time last year.
• Crude petroleum prices expanded 2.3 percent in September but are down 54.3 percent from the same time last year.
The key input prices that fell or remained flat are:
• Crude energy materials prices dipped 1 percent in September and are down 39.9 percent from the same time last year.
• Fabricated structural metal product prices fell 0.l percent for the month and are down 0.6 percent on the year.
• Iron and steel prices fell 1.1 percent for the month and 18.8 percent for the year.
• Prices for steel mill products fell 0.8 percent from last month and 14.9 percent from last year.
• Nonferrous wire and cable prices are down 0.8 percent in September and 7.8 percent from the same time last year.
• Softwood lumber prices fell 3.8 percent on a monthly basis and 12.2 percent on a yearly basis.
• Prepared asphalt, tar roofing and siding declined 1.9 percent for the month but expanded 2.5 percent from the same time last year.
• Natural gas prices fell 7.5 percent on a monthly basis and are down 35.8 percent from the same time last year.
Source: http://www.abc.org/NewsMedia/ConstructionEconomics/ConstructionEconomicUpdate/tabid/270/entryid/4525/construction-material-prices-plunge-in-september.aspx

Filed under: Construction,Surety Monthly — Jillian Bender-Cormier @ 10:37 pm