The Washington State Legislature will hold a public hearing on March 16, 2011 at 3:30 p.m. before its Senate Committee on Transportation on SHB 1384, which unanimously passed the House on March 5, 2011.
No Retainage Would Help Cash Flow of Small Businesses: This bill would prohibit withholding of retainage on public works projects with federal transportation funding. The purpose of the U.S. Department of Transportation (USDOT) regulations is to help the cash flow of small businesses by ensuring either prompt payment of retainage or by not withholding retainage. The Washington State Department of Transportation (WSDOT) has proposed the legislation in order to comply with USDOT regulations. However, rather than provide options for handling retainage as permitted in the federal regulations, SHB 1384 only authorizes one option: not withholding retainage on federally funded transportation projects.
Unintended Consequences? While the intent of the federal regulations is to provide more timely payments to small businesses, the implementation of SHB 1384 may have unintended negative consequences on small businesses. Because SHB 1384 would rely upon a contractor's payment bond to address any claims filed (from subcontractors, suppliers, workers, or state agencies that would otherwise be filed against the retainage), bonding companies and contractors may require payment bonds from more small business subcontractors in order to reduce risk to the contractors and sureties.
Can Small Businesses Obtain Bonds? While increasing the cash flow for small businesses would be a benefit, with firms obtaining 100% of each progress payment, small businesses have historically had difficulty obtaining bonds. Thus, many small businesses may find themselves unable to participate on public works projects with federal transportation funding due to bonding requirements that may be imposed. A bill intended to help small businesses may end up hurting them in the long run.
Alternatives Are Complicated: An alternative would be to amend SHB 1384 to include all of the options permissible by USDOT regulations regarding retainage, including requiring prompt release of retainage to subcontractors. This option would be more administratively cumbersome for public agencies to administer, but it would encourage, rather than discourage, participation by small businesses on public works projects. A further complicating factor, even if the legislation is amended, is that retainage is established as a trust fund for the protection of workers, suppliers, subcontractors, and state agencies for the payment of taxes and premiums. To the extent that retainage is released early, public agencies may still pick up liability for claims if retainage related to a particular subcontractor had already been released.
More Discussion Needed: While some form of legislation is necessary to meet the federal regulations, it is unfortunate that a well thought through solution has not been discussed with various stakeholders including public agencies and small businesses.
Mike Purdy's Public Contracting Blog© 2011 by Michael E. Purdy Associates, LLChttp://PublicContracting.blogspot.com
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