Room 531-N -- February 13th 2006
"The greatest and most turbulence today results from the collision between the delusions of the decision makers- whether they are in governments, in the top management of business, or in union leadership,- and the realties of the world". Peter Drucker
We have been exposed to testimony from large and small companies, owner representatives, architects, General Contractors (GC), and subcontractors (SC). This testimony is vital in helping us decide this issue of retainage and the effect it may have on the way we conduct business within the private sector. Make no mistake; this proposed legislation may have a huge impact.
We have heard horror stories from both sides of this issue; contractors that do not pay, subcontractors that do not perform, suppliers who are not paid, paying twice for materials, bankruptcies, and long delays in receiving payment. Hopefully these stories reflect the exception and not the norm.
We heard that total removal of retainage is out of the question and I agree. Some element to insure satisfactory job performance is essential. What I propose; will insure that payment is received within a reasonable time following completion of contracted work. Testimony revealed that a performance bond may be hard to obtain by some subcontractors and if required, will raise the cost of a completed project. Remember the bond is an insurance policy that guarantees to the owner that a project or portion thereof will be satisfactorily completed or funds are provided to allow the contractor to hire another subcontractor to complete the work.
The cost may increase and this is a consideration for the builder or owner. As the law now stands an owner/developer can withhold funds until well after total completion of the project. We were provided with results of a nationwide study conducted in 2004 by Clemson University that shows an average time to receive a final retainage payment to be 167 days for subcontractors and 99 days for contractors. The study revealed the total retainage was often not paid in full (GC 93.8%, SC 89.6%). We heard the owner held release of this money for various reasons.
I would offer an example that on a $10 million project the retainage amount can be $1 million and remember this money has already been spent by the subcontractor. Taking into account the possible 167 day delay for receipt of payments, a subcontractor could wait a year to get his money. The owner could be using these funds to help finance the total project. An owners construction loan need not be drawn upon until the latest possible date and in a worse case this obligation may never be fully satisfied. This does not seem fair to me.
Testimony indicated some subcontractors may be struggling and the general contractor will not know of these problems until it is too late. Remember the story of having to pay for materials twice although lien release had been provided? False documents could be a problem, perhaps retainage could help mitigate the damage but certainly retainage alone would not be enough to satisfy a claim for material costs. There enters the bond requirements or insurance possibilities.
If all contractors performed due diligence prior to signing contracts, in selection of projects, and enjoyed a positive working relationship with each other this issue would never had been noticed. Normally a subcontractor provides his quote to numerous GCs. Providing different values to each GC will extend the time requirement necessary to produce such documents.
Remember the example where the concrete contractor did not provide the proper "block outs" in the roof for the project and that were not noticed until months later when the mechanical contractor needed to install piping or ductwork? Without retainage what incentive would the "at fault contractor" have to return to complete his required task or pay for someone else to cut the concrete? . Without assigning blame on poor progress inspections to the builder or architect; there would remain the adherence to conditions of the contract and warranty provision. Unintentional omissions are practically unavoidable.
The basic contract documents and blueprints both state that all bidders are to familiarize themselves with all documents, drawings, and visit the site locations. Any omissions or conditions discovered are the responsibility of the subcontractor and are to be reported to the architect immediately. This caveat is to protect the designers and uses the professional expertise and experience of the contractors to report any shortfalls in the design documents.
We heard the GC and SC are personally responsible and should consider all the consequences prior to entering into a contract. They have all the options of not bidding if they can not meet the conditions of the contract. The proposed changes of this statute puts the same responsibility on the owners or developers. Due diligence is required of all parties.
To what extent should the government get involved with the minute details of a contract? This is a valid argument and deserves our discussion. The changes I have proposed address the power normally reserved to the contractor and owner over the smaller contractors. These proposals will level the field and gives all parties to a private construction contract equal opportunities for negotiating their conditions.
I agree with the AGC position as to retaining the definition of Substantial Completion, page 1, line 39, Section 1 (h). I disagree with the ASA position to delete the same. I concur with both parties on changing from 60 to 30 days, page 3, line 18, Section 3, (b). I disagree with the AGC position to delete the language on page 2 line 4 that begins with "but in any case" and continues on page 3 lines 1-4 that ends "under the contract". I disagree with any language that will provide for "line item" substantial completion as proposed by ASA.
There has been many hours spent by all parties involved with HB 2655 and I appreciate the efforts of both the opponents and proponents. Since there is something for each and neither party gets their full request I assume we will have some additional balloon changes or amendments.
I appreciate your consideration and will stand for questions.
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