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New Law Requires New Claim Resolution Process for Public Works Projects

On September 29, 2016, Governor Brown signed Assembly Bill 626 (“AB 626” or the “Bill”) which creates significant new requirements for administering the claims process for public works projects in the State of California.

Codified in section 9204 of the Public Contract Code, AB 626 establishes, for contracts entered into on or after January 1, 2017, a claim resolution process that must be applied to any and all claims by contractors in connection with a public works project. The Bill also creates a process whereby a subcontractor, who may lack legal standing to assert a claim against a public entity, may make a claim through the contractor.

The Bill defines a claim as a separate demand by the contractor for one or more of the following: (i) a time extension for relief from damages or penalties for delay, (ii) payment of money or damages arising from work done pursuant to the contract for a public work, or (iii) payment of an amount disputed by the public entity, as specified. The Bill also includes charter cities and charter counties in the definition of public entity, but excludes certain state agencies.

AB 626 requires a public entity, upon receipt of a claim sent by registered or certified mail, to review it and, within 45 days, provide a written statement identifying the disputed and undisputed portions of the claim. The 45-day period may be extended by mutual agreement or, until after the next meeting of the governing body of the public entity, if the governing body must approve the disputed and undisputed portions of the claim. The Bill also requires any payment due on the undisputed portion of the claim to be processed within 60 days.

If the claimant disputes the public entity’s written response or if the public entity fails to respond to a claim within the time prescribed, the claimant must demand a meet and confer for settlement of the issues in dispute. The public entity must then schedule a meet and confer conference within 30 days for settlement of the dispute. The Bill requires any disputed portion of the claim that remains in dispute after the meet and confer conference to be subject to nonbinding mediation, as specified. The public entity can also require arbitration of disputes under private arbitration or the Public Works Contract Arbitration Program, if the mediation does not resolve the dispute.

If the public entity fails to respond to a claim from a contractor within the time periods prescribed in the Bill, the claim is deemed rejected in its entirety. The Bill provides that unpaid claim amounts which are not paid in a timely manner shall accrue interest at 7% per annum. Finally, the Bill requires public agencies to incorporate language in their plans or specifications setting forth these new requirements and claims procedures, which include strict timelines for dispute resolution.

We encourage you to contact your City Attorney, or General Counsel, to discuss this very important change in the law and update your agencies’ specifications accordingly.