Monday, January 24, 2011

Federal Transportation Funded Projects Prohibit Withholding of Retainage

Federal regulations of the U.S. Department of Transportation (49 CFR 26.29) that essentially prohibit the withholding of retainage on projects it funds are causing states to change their practices and laws.  

Waiver Denied by FHWA:  After working with the Federal Highway Administration (FHWA) for three years, the Washington State Department of Transportation (WSDOT) has been unsuccessful in obtaining a waiver of compliance with the federal regulations based on the state's retainage statute (chapter 60.28. RCW). 

Retainage Exemption Legislation Introduced:  WSDOT has developed draft legislation that would exempt "public improvement contracts involving the construction, alteration, repair, or improvement of any highway, road, or street funded in whole or in part by federal transportation funds" from withholding retainage on these projects. 

Payment Bond Would Protect Claimants:  House Bill 1384 would also require that the protections currently provided to subcontractors, suppliers, workers, and three state agencies (Revenue, Employment Security, and Labor and Industries) through retainage be provided instead through the payment bond. 

Implications of HB 1384: 
  • Expansion of Protected Parties Under a Payment Bond:  HB 1384 states that such federally funded projects "shall rely upon the contract bond as referred to in chapter 39.08 RCW for the protection and payment of (i) The claims of any person or persons arising under the contract to the extent such claims are provided for in RCW 39.08.010, and (ii) the state with respect to taxes imposed pursuant to Titles 50, 51, and 82 RCW which may be due."  Payment bonds are not typically used to ensure payment of taxes, but HB 1384 would expand the purpose of payment bonds on federal transportation funded projects in Washington State.  Public agencies would need to ensure that the payment bonds they received actually included language beyond the standard language so that the three state agencies would be able to make a claim against the payment bond.  Furthermore, chapter 39.08 RCW that is referred to in HB 1384 does not mention that the three state agencies are protected by the payment bond.  Perhaps HB 1384 should be amended to add a provision to chapter 39.08 RCW with respect to federal transportation funded projects.
  • Increased Bond Premiums:  Under HB 1384, the cost of a payment bond premium to contractors may increase based on additional financial liability to bonding companies, an added cost that would be passed onto public agencies.  Bonding companies would pick up additional liability in two areas: 1) Currently, it is typical that claims filed by subcontractors, suppliers, and workers subject to prevailing wages are first handled by retainage, and in the event retainage is not sufficient to cover all claims, through the payment bond.  Under HB 1384, with no retainage, claims would go directly against the payment bond, thus increasing the potential liability of bonding companies.  2) Currently, a payment bond only protects subcontractors, suppliers, and workers subject to prevailing wages.  Under HB 1384, three state agencies would be added as protected parties under the payment bond (Revenue, Employment Security, and Labor and Industries).  The added premium costs for payment bonds would be passed onto public agencies and reflected in higher bids.
  • Increased Cash Flow:  With no retainage being withheld, contractors and subcontractors on projects funded with federal transportation funds would increase their cash flow by being paid 100% of each progress payment.
  • Prompt Payment vs. Protection if Not Paid?:  What FHWA's regulations point out is a policy collision on the purpose of retainage.  FHWA's regulations are intended to help small businesses with their cash flow by ensuring either prompt payment of retainage or not withholding retainage.  By eliminating retainage, as contemplated in the State of Washington's response to federal regulations, contractors and subcontractors would be paid 100% of each progress payment, but subcontractors and suppliers would loose the protection afforded by a claim being filed against retainage.  The only recourse for a claimant under HB 1384 would be to file a claim against the payment bond.
  • Public Agencies Would Not Protected:  Currently, under RCW 60.28.021, if after all claims against the retainage have been satisfied, "the public body may withhold from the remaining retained amounts for claims the public body may have against the contractor."  This right to tap into retainage by a public body would be eliminated for federally funded transportation projects with the passage of HB 1384, which does not list public agencies as being able to make a claim against the payment bond.
Mike Purdy's Public Contracting Blog 
© 2011 by Michael E. Purdy Associates, LLC

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