Clarifications on New Retainage Law (SHB 1384)

Last week I wrote a blog entry on the new Washington State law (SHB 1384)  that prohibits withholding of retainage on certain federally funded transportation projects.  The law went into effect on July 22, 2011.

Based on a number of conversations with WSDOT and others, and feedback from readers, I'd like to look in more depth at a couple of issues related to SHB 1384.

What Agencies Does SHB 1384 Apply To?

• Why was SHB 1384 Introduced?  The reason SHB 1384 was introduced was to address a conflict between USDOT regulations (49 CFR 26.29) and state law (RCW 60.28) regarding prompt payment and withholding of retainage.  FHWA (Federal Highway Administration) found that WSDOT was not in compliance with 49 CFR 26.29, and thus WSDOT facilitated the introduction of SHB 1384 to allow them to be in compliance with both federal regulations and state law.

• What Agencies Must Comply With USDOT Regulations? USDOT funds public works projects through a variety of programs, including but not limited to FHWA, FTA (Federal Transit Administration), and FAA (Federal Aviation Administration). Public agencies who receive funding from USDOT through any of their programs (FHWA, FTA, and FAA) must all presumably comply with 49 CFR 26.29 regarding prompt payment to contractors and subcontractors.  However, the language of SHB 1384 does not appear to apply to USDOT projects funded by any program other than FHWA.

• SHB 1384 Applies to FHWA Funded Projects:  SHB 1384 appears to only apply to FHWA funded projects for a "highway, road, or street."  In addition, Section 1 of the bill notes that "the legislature recognizes that federal regulations include requirements that pertain to contracts funded by federal-aid highway funds," meaning FHWA funded projects.

• Should SHB 1384 Apply to FTA or FAA Funded Projects?  Public agencies who receive funding from FTA, FAA, or other USDOT programs are in a difficult position.  They must comply with 49 CFR 26.29 for prompt payment of retainage, which conflicts with RCW 60.28 regarding retainage.  These public agencies should consult with their attorneys and funding agencies regarding the appropriate practice to follow.  It seems to me there may be a couple of theoretical options to consider:  1) Comply with federal regulations, but not state law (which could result in a state audit finding).  2)  Comply with state law, but not federal regulations (which could result in loss of federal funding).  3) Require a retainage bond instead of withholding retainage.

• Should SHB 1384 Be Fixed by the Legislature in 2012?  Because it appears that SHB 1384 may not have been as comprehensive as necessary in order to ensure prompt payment provisions are met on all USDOT funded projects, this may be a good topic for consideration by the Legislature in 2012, and something that perhaps the Capital Projects Advisory Review Board (CPARB) should address in making recommendations to the Legislature.  It is my understanding that a number of agencies impacted by the conflict between federal regulations and state law are actively discussing their response now.

Effective Date:  With regard to the effective date of administering the new law, it has come to my attention that WSDOT has administratively determined that the new requirements will become effective for FHWA Federal-Aid projects advertised on or after June 27, 2011.  

WSDOT Revisions Made:  WSDOT has developed General Special Provisions (GSP) for their specifications dealing with changes in both the retainage and contract bond provisions.  They have also added a sentence covering the tax liability (Revenue, Employment Security, Labor and Industries) to their standard Local Agency Contract Bond, which combines payment and performance provisions into one bond.  Even if a local agency chooses not to use WSDOT's Contract Bond form, language protecting the three state agencies should be added to the bond form used.  Many public agencies obtain separate payment and performance bonds, each in an amount of 100% of the contract amount in order to provide more protection to the agency.

Consult Your Attorney and Funding Agency:  This is a complicated subject and one that public agencies should consult with their attorneys and funding agencies about to determine the most appropriate course of action.

Mike Purdy's Public Contracting Blog 

© 2011 by Michael E. Purdy Associates, LLC

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