Withholding Contract Funds

Division 2, Part 5 of the California Public Contract Code provides for the withholding of contract funds. Section 22300 defines the term “contractor.”

In addition, this section requires provisions to be included in any invitation for bid and in any contract documents to permit the substitution of securities for any moneys withheld by a public agency to ensure performance under a contract, with specified exceptions. At the request and expense of the contractor, securities equivalent to the amount withheld are to be deposited with the public agency, or with a state or federally chartered bank in this state as the escrow agent, who shall then pay those moneys to the contractor. Upon satisfactory completion of the contract, the securities are returned to the contractor.

Alternatively, the contractor may request and the owner must make payment of retentions earned directly to the escrow agent at the expense of the contractor. At the expense of the contractor, the contractor may direct the investment of the payments into securities and the contractor then receives the interest earned on the investments upon the same terms provided for in this section for securities deposited by the contractor.

 Upon satisfactory completion of the contract, the contractor shall receive from the escrow agent all securities, interest, and payments received by the escrow agent from the owner, pursuant to the terms of this section. Failure to include these provisions in bid and contract documents voids any provisions for performance retentions in a public agency contract. The term “public agency” is defined.

Any contractor who elects to receive interest on moneys withheld in retention by a public agency must make, at the request of any subcontractor, that option available to the subcontractor regarding any moneys withheld in retention by the contractor from the subcontractor. If the contractor elects to receive interest on any moneys withheld in retention by a public agency, then the subcontractor will receive the identical rate of interest received by the contractor on any retention moneys withheld from the subcontractor by the contractor, less any actual pro rata costs associated with administering and calculating that interest.

This subdivision applies only to those subcontractors performing more than five percent of the contractor’s total bid. Contractors are prohibited from requiring any subcontractor to waive any provision of this section.

In addition, the owner is required to make progress payments to the contractor for those funds which otherwise would be withheld from progress payments pursuant to the contract provisions, provided that the escrow agent holds securities in the form and amount specified above. When the owner makes payment of retentions earned directly to the escrow agent, the escrow agent is required to hold them for the benefit of the contractor until the time that the escrow created under this contract is terminated.

The contractor may direct the investment of the payments into securities, and the contractor is responsible for paying all fees for the expenses incurred by escrow agent in administering the escrow account and all expenses of the owner. The owners has a right to draw upon the securities in the event of default by the contractor.

Upon receipt of written notification from the owner certifying that the contract is final and complete, and that the contractor has complied with all requirements and procedures applicable to the contract, the escrow agents releases to the contractor all securities and interest on deposit less escrow fees and charges of the escrow account.