Subcontractor substitution in California is necessary due to the strict nature of subcontractor listing laws for public works projects. A Direct contractor on a public works project must list subcontractors in its bid that will perform work exceeding one-half of 1 percent of the direct contractor’s total bid. But what if the listed subcontractor refuses or is otherwise unable to perform the work? Direct contractors and subcontractors must understand their rights and obligations, as well as the potential penalties, for failing to formally substitute a subcontractor.
What is “Subcontractor Substitution”?
“Subcontractor Substitution” generally refers to the legal process which must be followed by a direct contractor on a California public works project in order replace a listed subcontractor. If the direct contractor intends to have a subcontractor other than the listed subcontractor perform the work, then the listed subcontractor is entitled to receive notice of the requested substitution and the reasons for it.
When is a Direct Contractor Allowed to Substitute a Listed Subcontractor in California?
Public Contract Code section 4107, subsection (a), provides nine (9) different bases upon which a direct contractor may request a public owner approve a subcontractor substitution. They are summarized as follows:
- Subcontractor fails or refuses to execute a written contract.
- Subcontractor becomes insolvent or the subject of an order for relief in bankruptcy.
- Subcontractor fails or refuses to perform his or her subcontract.
- Subcontractor was listed as the result of an inadvertent clerical error.
- Subcontractor is not licensed pursuant to the Contractors State License Law.
- Subcontractor fails or refuses to meet the bond requirements of the direct contractor as set forth in Public Contract Code section 4108.
- Awarding authority determines that subcontractor’s work is substantially unsatisfactory and not in substantial accordance with the plans and specifications, or that the subcontractor is substantially delaying or disrupting the progress of the work.
- Subcontractor is ineligible to perform work on public works because it defrauded its apprentices with respect to wages pursuant to Labor Code sections 17771.1 or 1777.7.
- Awarding authority determines that the listed subcontractor is not a responsible contractor.
Is a Public Owner’s Approval Always Required to Remove a Subcontractor on a Public Works Project?
No. If listed subcontractor refuses to perform the work after having a reasonable opportunity to do so. And the direct contractor elects to perform the work itself instead. Then, no permission from the awarding agency is required. (W.J. Lewis Corp. v. Harper Construction Co. (1981) 116 Cal.App.3d 27.) But if the direct contractor intends to replace the listed subcontractor with a new subcontractor, then a formal subcontractor substitution request must be submitted to the public owner.
Can a Listed Subcontractor Object to the Direct Contractor’s Substitution Request in California?
Yes. If the direct contractor intends to have a new subcontractor perform the work which the listed subcontractor was going to perform, then the listed subcontractor is entitled to receive notice of the requested substitution and the reasons for it. The listed subcontractor then has five (5) days from this written notice to object to the substitution request. A subcontractor’s failure to file a timely written objection constitutes its consent to the substitution. If a written objection is filed, the public owner must hold a hearing and provide the listed subcontractor written notice at least five working days prior to the hearing. (Pub. Contract Code § 4107(a).)
What Happens When a Direct Contractor Unlawfully Substitutes a Listed Subcontractor?
If the direct contractor fails to follow the subcontractor substitution procedure the public owner has two options. The public owner can elect to cancel the direct contractor’s contract altogether. Or it can assess a monetary penalty not exceeding 10% (ten percent) of the price if the improperly substituted subcontract. Any violation of the Subcontractor Listing Law may be a cause for disciplinary action by the Contractors State License Board. (Pub. Contract Code § 4111.)
What Rights Does a Listed Subcontractor Have if it is Unlawfully Substituted Off of a Public Works Project?
A listed subcontractor who was replaced by another subcontractor without a formal substitution request may sue the direct contractor for any resulting damages. These damages may include include lost profits resulting the listed subcontractor’s loss of the work. (Southern California Acoustics Company v. C.V. Holder, Inc. (1969) 71 Cal.2d 719.)