A Refresher on “Prelims” — Part 3 The Challenge of “Substantial Accuracy”

By July 18, 2016 October 25th, 2018 Construction Litigation Blog, James Wakefield
James R. Wakefield

James R. Wakefield

In this final post about Preliminary Notices, we will address a question that often arises when completing the required information: What should a contractor or material supplier do if the price listed on its Preliminary Notice turns out to be much lower than the actual cost of the work?

What is Substantial Accuracy?

Prior to July 2012, the California Civil Code required a claimant (contractor, subcontractor, or material supplier) to serve a Preliminary Notice that stated “with substantial accuracy a general description of labor, service, equipment, or materials furnished or to be furnished.” The term substantial accuracy gave all parties to a construction project and the Courts quite a bit of difficulty. What is “substantial accuracy?”

The “inaccuracy” alleged was always that the estimated price of the work was much less than what was ultimately charged. The Courts decided that it did not matter whether the Preliminary Notice was accurate as long as the owner or general contractor was not prejudiced by any inaccuracies. But then the Courts had to determine when the owner or general contractor was prejudiced. Ultimately, the Courts’ decisions seemed to hinge on whether the contractor or material supplier made a good faith estimate. (Which has nothing to do with whether the owner was prejudiced or whether the estimate was substantially accurate.) The Courts compounded this problem rather than resolving it.

Good Faith Estimates Are Key

Therefore, when the legislature revised the Civil Code governing construction, it revised the required contents of a Preliminary Notice [Civil Code §8202] and eliminated the term substantial accuracy. Now, the code requires the person serving the notice to state:

  • A general description of the work to be provided;
  • An estimate of the total price of the work provided and to be provided. [Civil Code §8202(a)]

At this time we know of no Court decisions that have interpreted Section 8202. But we can make certain assumptions. The Courts will require the estimate of the total price to be a good faith estimate. That will turn on the facts that the contractor or material supplier knew when it made its estimate. While some commentators have suggested previously that if the price of the work goes up considerably, the claimant should consider filing an amended Preliminary Notice, we do not usually subscribe to that view.

Section 8206 of the Civil Code provides that a claimant need only give one Preliminary Notice even if the work provided after the notice is not within the scope of the original general description. So if the job grows considerably and hence the price, the code still requires only the original notice. We believe the key is for the claimant to ensure that when it estimates the price, it does so based on all the information it has been provided about the project at the time of giving notice.

In the end, if you follow these guidelines, don’t worry about a job that grows and a price that expands with it. Just take your extra money to the bank and be happy!

Some Closing Thoughts — Always Give a Preliminary Notice

My goal with this three-part blog series was to highlight important details of the Preliminary Notice process. The most important thing to remember is to always give a Preliminary Notice to all key parties, including:

  • The owner of the property and the tenant if that is for whom the work is being done;
  • The lender, if there is one;
  • The direct contractor, and if your customer is the subcontractor, then the subcontractor as well.

If you fail to give a Preliminary Notice to any of these parties, then you have no lien rights, no stop notice rights, and no rights to claim against a payment bond if there is one. Giving a Preliminary Notice is the cheapest insurance policy you could possibly buy. The charges of a professional lien service company are nominal, but the cost of giving a defective Preliminary Notice or failing to give a Preliminary Notice could be catastrophic. Always give a Preliminary Notice!

Let me know if you have questions or comments about California’s Preliminary Notice requirements. Reach me by email at JWakefield@cwlawyers.com or call me 949/852-1800.