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

James R. Wakefield, P.C.'s Construction Law Legal Blogs

Licensed for 36 years

Attorney in Newport Beach, CA

James R. Wakefield, P.C.

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  • Free initial consultation, Credit cards accepted, Fixed hourly rates

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Serving Newport Beach, CA

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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.

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