Effective January 1, 2017, California Public Contract Code Section 9204 was added. This new regulation establishes a claims resolution process for state and local public contracts. The intent of the regulation is to ensure that contractors are paid for undisputed claims in a timely manner, that interest is due for amounts not paid in a timely manner, and that there is a process for resolving disputed issues. Except for those entities specifically excluded, the new regulation applies to all California public entities – state agencies, local cities and counties (including charter cities and counties), districts, special districts, public authorities and others.
The regulation puts into place a multi-step process for the handling of construction claims with specified notification and response times:
- Payment of undisputed amounts must be made within 60 days after issue of the written response
- Failure of the owner to respond within the time allowed shall result in the claim being rejected in its entirety
- Payment of undisputed amounts must be made within 60 days after issue of the written response
The last step in the process is to take the disputed claim to mediation or some other non-binding dispute resolution process. The agency and contractor may agree to waive this step and proceed directly to arbitration or litigation, however, the intent of the regulation is to create an avenue for timely, fair and practical resolution of construction claims. There are a variety of options available for non-binding dispute resolution but it makes sense to anticipate which approach is best for each project and agency and to include language in the contract appropriate to the option desired so that the process moves forward smoothly within the relatively short window provided. If mediation is the desired approach, the contract should state where and how a mediator will be selected. If it is intended to use a Project Neutral, the process for selection of this individual and the schedule for selecting this person should be stated. If a Dispute Resolution Board (permanent or ad hoc) is the selected process, the process for member selection, selection schedule and the responsibilities of the Board need to be described. Each of these approaches have advantages and disadvantages as well as varying costs.
The regulation does allow public agencies to be reimbursed for higher administrative costs associated with the new process so it is important that each agency have a system on place that allows for the collection of costs and time spent associated with administration of the new process.
The new law applies to all public works projects contracted after January 1, 2017 and is scheduled to sunset on January 1, 2020.