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CONTRACTOR'S CORNER - Send us your questions...

Estimating Your Prelim - How Close Do You Have to Be?
by David J. Barnier

California Civil Code Section 3097(c)(1) requires that a contractor's 20-day preliminary notice ("prelim") include "a general description of the labor, service, equipment, or materials furnished, or to be furnished, and an estimate of the total price thereof."

How accurate must the estimate be?

Until recently, there was little or no California case law to help clarify exactly how accurate a prelim must be. However, in August 2001, the Second District Court of Appeals of California (located in Los Angeles) gave some guidance to the construction industry on this question. The court held that a prelim by an equipment rental company was defective because the estimated price stated in the prelim was not a true "estimate" in that it did not take into account information that was readily available to the company that would have assisted it in better estimating the total price (Rental Equipment, Inc. v. McDaniel Builders, Inc. [109 Cal.Rptr. 922]).

This is good news for contractors, rental companies, and materials suppliers. While the ruling in Rental Equipment was not favorable to the equipment rental company in that case, the ruling was favorable to all other contractors, rental companies, and materials suppliers in California. The explanation behind this irony is that the $10,000 estimate by the equipment rental company in the Rental Equipment case was less than the amount already charged to its customer on that job. At trial, the credit manager for the equipment rental company testified that the estimate was merely a "rounded up" amount from the first invoice related to that job. The court held that this was clearly not an "estimate of the total price" as required by California Civil Code Section 3097(c)(1), as it did not involve an evaluation of any of the information available to the equipment rental company as to the equipment already furnished and the equipment still anticipated to be furnished.

In making this ruling, the court stated that it was concerned about the negative prejudicial effect of an underestimated prelim on the property owner. In that particular case, the owner had a $145,000 subcontract with the rental company's customer, but the rental company's eventual mechanic's lien was in the amount of $159,898. The owner (which was the party challenging the equipment rental company's prelim) was able to prove to the court that, had the prelim been $75,000 or more,

the owner would have called a meeting with the contractor/customer to address the issue of excessive equipment rental charges.

In summary, the court's published opinion made it clear that the estimate in a prelim:

* must be based upon the total estimated price to be charged for labor, services, and equipment furnished or to be furnished, but that this estimate does not need to be "substantially accurate"

* does not need to include a statement of all rental charges to be incurred throughout the rental period, but instead needs to (be an) estimate of the total charges that are anticipated

* can be effective despite "badly [missing] the mark with reference to the total charges as finally tallied," so long as the estimate was reasonable at the time it was made and was based upon information available to the claimant at that time

* must be more than a "guess, conjecture, or surmise"

The California Supreme Court along with lower California courts have repeatedly recognized that the mechanic's lien, stop notice, and payment bond laws exist primarily to protect those parties that bestow value upon property. The courts have cited this policy in supporting various holdings that favor the contractor over the owner/lender/surety. However, the courts have also recognized that the prelim requirement exists to protect the interests of the owner/lender/surety. It was this recognition of the interests of the owner in the Rental Equipment case, especially the prejudicial effect described above, which led the court to invalidate the rental company's prelim.

What should a contractor, rental company, or material supplier learn from this recent court decision? While the facts of the Rental Equipment case may have been extreme, the message from the court is clear. The purpose of the prelim is to give the receiving parties notice of the likely amount of a possible future claim. The court did not hold that the amount of the prelim had to be accurate. It did hold that a claimant must make some effort to review available information when estimating total charges, and not choose an arbitrary dollar amount.

To protect yourself, your company should reference all information it has before calculating a prelim amount and keep clear records reflecting what information was considered as part of the calculation. These records would help prove your company's good faith effort to estimate the anticipated total price.

This article is intended as a topical discussion of general legal principals. While general rules may exist, there are many exceptions and qualifications to these general rules. No party should use this article as a substitute for obtaining specific legal advice from a qualified attorney.

David Barnier is an attorney with the law firm of Barker Olmsted & Barnier in San Diego, California. He may be reached at (619) 682-4842 DJB@barkerolmsted.com or through www.barkerolmsted.com

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HOSTING A HOLIDAY PARTY?

A couple days ago we received a fax from an insurance company that is promoting *event insurance* for events such as holiday parties hosted by employers. We contacted our insurance agent, Gary Oltmanns of Southern California Insurance Brokerage, Inc. and asked him about this type of insurance. We found out that our general liability insurance policy covers us for parties we host, under the *host liquor liability* portion of our general liability insurance policy! Are you planning on hosting any kind of business related party? If so, Gary told me that he would be happy to answer any questions you might have, before you throw your shindig. You can even call him at his toll-free 800 number: 1-800-900-9372 His name is Gary Oltmanns and his partner is Gabe Hill. Either one of these guys will be happy to help you out!

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Thanks for reading! We hope you enjoyed it! Have a terrific day! Diane
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Diane Dennis
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