How to Substitute or Remove Listed Subcontractors on California Public Works Construction Jobs Under California’s Fair Practice Act Law

The California Subletting and Subcontracting Fair Practices Act has long been an important part of all Public Works contracting by all levels of Government in California.

The purposes of the Subletting and Subcontracting Fair Practices Act (or the “Fair Practice Act” or the “Listing Law”) is to prevent post-award “bid shopping” or “bid peddling” with - or cut-throat competition among - other subs for the same “portion of the work”, and to prevent a successful prime contract bidder from undercutting subcontract bids after award of the prime contract so as to increase its profits.

This practice is one which is effectively prohibiting by the Listing Law, as this conduct was found to lead to poor work, lost wages, insolvencies and bankruptcies by subcontractors on public works projects, delays, and similar public mischief. See, Public Contract. Code § 4101; Valley Crest Landscape, Inc. v. City of Vallejo (1994) 41 Cal.App.4th 1432, 1440-1441.

The Law’s substitution and its substitute approval process also gives the public agency to the right to learn the identity of - and the right to approve - any new substitute subcontractors who might be working on a job.

To prevent this bid-shopping Public Cont. Code §4104(a)(1) & (b) therefore require that prime contractor bidders on public jobs list in their bid the name and the “portion of the work”¹ to be performed by any subcontractor in an amount in excess of $10,000 or more than .5% of the total bid price, whichever is greater.

To further prevent circumvention of these requirements, prime contract bids may list only one subcontractor for each “portion of the work” to be done by each subcontractor. Pub Cont. Code §§ 4106, 4105.

If more than one subcontractor is listed as performing the same portions of the work, then the prime contractor must perform that portion of the work itself, without using any subcontractors on that “portion of work”. Public Contract. Code §§ 4106, 4105, 4107(b).

After the bids are opened, the prime contractor may not substitute any other “person” or “another person” as a subcontractor in place of one listed in its bid pursuant to Section 4104, unless it does so only “for cause” on one of the express statutory grounds, and subject to the public agency’s prior approval of a specifically named substitute, and in compliance with statutory procedures. Public Cont. Code §§ 4107(a)(1)-(9), 4107(b) & 4106.

Among the grounds for “substitution” for cause of one new subcontractor for a listed one is if the listed subcontractor fails to execute a written subcontract “for the scope of the work specified in the subcontractor’s bid", failure to provide payment or performance bond per pre-bid bond requirements issued by the prime contractor in writing prior to the bid date², bankruptcy, failure to perform or adequately perform the work, if the sub “is not licensed pursuant to the Contractors License Law”³ for the listed “portion of the work”,and if a subcontractor was listed due to clerical error.

Any substitution requires 5-days actual prior notice from the public agency to the subcontractor of the proposed substitution, with a statement of the “reasons for the request”, by certified mail, the right to a due process hearing by the subcontractor upon request after due notice, and the express approval of the public agency of the substitution of a specific new substitute subcontractor. Public Cont. Code §4107(a); E.F. Brady v. M.H. Golden Co. (1997) 58 Cal.App.4th 182, 190-191. (emphasis added)

To substitute a subcontractor listed due to a “clerical error” in the prime contractor’s subcontractor listing in its bid, the contractor must follow the procedures in Public Cont. Code §4107.5, including express consent thereto by a public agency after submission of affidavits establishing the existence of the error within six work days to the public agency by the prime contractor and the listed subcontractor and notice to the listed subcontractor. Public Contract. Code § 4107(a)(5)

Until and unless all the requirements of the statute are met, the prime contractor and the public agency have no right to substitute any other subcontractor for a listed subcontractor, nor may the prime contractor permit “anyone other than the original subcontractor listed in the bid” (emphasis added) to perform any of the work of a listed subcontractor. Public Contract. Code § 4107(b); R.J. Land & Associates Constr. v. Kiewit- Shea (1999) 69 Cal.App.4th 416, 421, 81 Cal.Rptr.2d 615.

And a listed subcontractor who was substituted off of a job without compliance with the statute has a cause of action under the law against the prime contractor for lost profits. Ibid at 421, 428.

Finally, a prime contractor has no cause of action against a listed subcontractor for the extra costs of a substitute sub unless there was a legal substitution, as the new subcontract would thus be an illegal contract. Kiely Corp. v. H.C. Gibson (1964) 231 Cal.App.2d 39, 44 - 47.

The Law’s substitution and its substitute approval process also gives the Government agency to the right to learn the identity of - and the right to approve - any new substitute subcontractors who might be working on a job.

The Fair Practices Act make compliance with it material to every public contract in this State. Public Contract. Code § 4104.

“The act seeks to protect both the public agency issuing the call for bids and subcontractors who submit subbids to prime contractors. (Southern Cal. Acoustics Co. v. C. V. Holder, Inc. (1969) 71 Cal.2d 719, 725–726 [79 Cal. Rptr. 319, 456 P.2d 975].) As to public agencies, the act permits the agency to investigate and approve both initially listed subcontractors and any substitute subcontractors proposed by the prime contractor. (See E. F. Brady Co. v. M. H. Golden Co. (1997) 58 Cal.App.4th 182, 190–191 [67 Cal. Rptr. 2d 886].)”(Emphasis added)

D.H. Williams Construction, Inc. v. Clovis Unified School Dist. (2007) 146 Cal. App. 4th 757, 765.

A breach of the Fair Practices Act also is, by statute, a breach of the Contract, , and a material breach of the Contract. Public Contract. Code § 4110.

“The provisions of the Fair Practices Act rest upon the basic principle ‘that the public is entitled to know exactly what it is paying for when it accepts a contractor's bid, and to get exactly that unless it consents to something different.’ (R. M. Sherman Co. v. W. R. Thomason, Inc., supra, 191 Cal. App. 3d at p. 567.) To that end, ‘the contracting agency has a right to investigate any proposed subcontractor, to reject the prime bid if any subcontractor is unacceptable, and to veto any proposed substitution after the bid is accepted.” (Ibid.)”

Thompson Pacific Construction, v. City of Sunnyvale (2007) 155 Cal. App. 4th 525, 540.

Subcontracting with other than listed subs without prior agency approval is illegal per se as a violation of a basic public policy of the State of California, as are all other actions taken by the prime contractor in violation of the Act. Kiely Corp. v. Gibson (1964) 231 Cal. App. 2d 39, 45-46.

"If [a Governement] agency had reason to believe a bidder knowingly listed a subcontractor, whether licensed or not, with the intention of substituting a different subcontractor once the prime contract was awarded, the agency clearly would be entitled to reject the prime bidder as not responsible”,

and award the Contract to the next lowest responsive, responsible bidder. D.H. Williams Construction, Inc. v. Clovis Unified School Dist., supra, 146 Cal. App. 4th 757, 766. (Emphasis added)

The public agency may impose a ten percent(10%) penalty on the prime contractor, or mat cancel the prime contract entirely if there are improper or unapproved substitutions. It may also have other effects on the general contractor on future jobs with that agency or other government contracts sought by the prime.

Failure to list all subcontractors, or substitution of subcontractors without the consent of the awarding agency is also very risky for a prime contractor, as the contractor must perform by itself all the work for which no subcontractor was listed.

And if a substitute or replacement of a listed subcontractor is done without the approval of the awarding Government entity following the procedures set forth in the statute, the substituted subcontractor has a claim against the prime contractor for its lost profits.

And the general contractor may not sue the replacement subcontract for breach of contract etc. because that subcontract was an illegal subcontract.

The replacement subcontractor also possibly may not be able to sue the general contractor to recover payment on the subcontract, also because its subcontract is illegal.

The lessons here are (1) that, if you are a prime or general contractor on a public works job, make sure that your bid lists subcontractors for all portions of the work that you do not intend to self-perform. And make sure that you follow the procedures and have good grounds for substituting another sub for a listed subcontractor.

If in doubt, get let advice from a competent government contracts attorney.

And (2) if you are a listed subcontractor who receives notice from the prime contractor or a public agency of a request to substitute you off the job, make sure you IMMEDIATELY send to the public agency a request IN WRITING for a hearing, and be prepared to assert legal defenses to and to present evidence in opposition to the substitution request at the administrative hearing.

Prime contractors are often represented by legal counsel at these hearings, which can sometimes even take a day or longer, so it is usually wise to immediately get legal advice or representation if you receive any substitution request.

These hearings are fact finding hearings, and the findings of the hearing officer could possibly be used against you later by the general contractor if it later sues you for breach of your bid or breach of contract.

So take these requests and hearings very very seriously, as they may end up determining more than just your being substituted off the job, and could affect your liability to the general contractor in a later lawsuit for the added cost to it of the replacement subcontractor.

The agency’s findings and decision may be reviewed by the Superior Court for lack of sufficient evidence or legal errors.

Finally, (3) if you are a subcontractor who is being asked to perform work on a government contract and were not listed in the prime’s bid, make sure that the listed subcontractor has been properly substituted off of the job before you agree to sign a contract, as this could affect your ability to get paid for your work.

The prime should show you proof and warrant to you that the public agency has approved the substitution of you for the listed subcontractor.

• ¹ This term is a flexible one, to be “defined by the prime contractor in his or herd”[Public Contract. Code § 4104(a)(1) & (b)], and is thus not limited by or to the various formal contractor’s license specialty contractor classifications.
• ² The prime must tell the subcontractors in writing of the bond requirement before they submit their bids, and may not impose bond requirements after bid day. Public Cont. Code §§ 4108( c), 4107(a)(4).
• ³ Bus. & Prof. Code § 7000, et seq.