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49 States Graded ‘F’ for Contractor Policies

Friday, January 16, 2009

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Anti-contractor public policies gave 49 states and the District of Columbia failing grades in the American Subcontractors’ Association biennial report card. New Mexico was the only state to notch a passing grade—a B—in the rankings, which evaluates the public policy environment for construction specialty trade contractors and suppliers in 2007 and 2008.

ASA’s biennial report tracks and researched changes in:

  • Prompt payment protections
  • Treatment of pay-if-paid clauses
  • Mechanic’s lien protections
  • Payment bond protections
  • Retainage limitations
  • Anti-indemnity protections, including limits on “additional insured” endorsements
  • Anti-“bid shopping” measures.

ASA limited the scope of the evaluation to state laws and court decisions in these policy areas.

This annual report evaluates the public policy environment on the state level as it relates to construction subcontractors. ASA defines that environment as the combined result of laws and judicial decisions relating to assurance of prompt payment of subcontractors when they have properly performed their work, equitable risk allocation, the integrity of the bidding process, and other policies.

The “Background” section spells out the specific policies evaluated by ASA. New Mexico remains the only state receiving a passing grade in The ASA Report despite significant strides elsewhere. Four states (California, Kansas, New York, and South Carolina) are within five points of a passing score. The policy environment in the states with failing grades covers wide ground, with scores ranging from 59 percent (e.g., Kansas and New York) to 13 percent (Wyoming).

Above all, the 2008 report reflects a growing understanding of sophisticated risk transfer issues, with legislators and courts taking new steps to limit how contracts or insurance for construction/design services may allocate liabilities.

Kansas led the way with legislation that closed the “additional insured” loophole, giving that state a score of 100 percent for this issue. The “additional insured” loophole permits risk-shifting through insurance not otherwise allowed by contract.

New York’s courts effectively banned a party from insuring others against work-related injuries that it had no part in causing.

California took on contractual indemnity, giving subcontractors new legislation to challenge excessive shifting of the costs associated with residential construction defects.

Alaska took important first steps by establishing proportional liability for construction-related service providers.

Awareness of the harmful effects of retainage continues to grow. Maryland enacted a 5 percent limit on retainage, including retainage held from subcontractors, on private construction when payment and performance security is in place. Iowa now requires that interest be paid if retainage is not released within 30 days of substantial completion.

California legislators are “testing the waters” of reform in a significant way, banning retainage on CalTrans projects for five years and limiting retainage (including retainage held from subcontractors) to 5 percent on design-build projects in a large number of counties, cities and school districts.

There was isolated, but sometimes significant, progress on other issues:

  • The Nevada Supreme Court served up a major win for subcontractors when it declared pay-if-paid against public policy with very limited exceptions, bumping that state from 42nd to 25th place overall.
  • A new Arizona law made construction owners responsible for amounts over the penal sum after bonding off mechanic’s liens.

A number of policy changes did not result in score changes, but were significant in other ways, such as New York’s Wicks Law reform. Payment assurance, onerous subcontracts, risk transfer issues and bid shopping continue to be significant and problematic public policy issues for subcontractors and suppliers.

Research showed great variation among the states in the level of protection and support they offer to subcontractors and suppliers, and scoring was complex. For example, mechanic’s lien laws vary in how many tiers of construction can claim liens, the construction owner’s liability, whether lien rights can be contractually waived, and notice and filing requirements.

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