New Law Prohibits Withholding of Retainage on Federally Funded Transportation Projects in Washington State

A new law in Washington State will prohibit public agencies from withholding retainage on public works projects funded in whole or in part by federal transportation funds.  

Instead, the parties normally protected by retainage will be protected through the contractor's payment bond.  The new law goes into effect on July 22, 2011.  It will affect not only the Washington State Department of Transportation (WSDOT), but local agencies receiving federal transportation funds directly from WSDOT or directly from the U.S. Department of Transportation (USDOT). 

Background:  The legislation, approved as SHB 1384 by the Washington State Legislature, was introduced in response to USDOT regulations designed to help increase cash flow to small businesses by ensuring either prompt payment of retainage or by not withholding retainage.  The new law is an amendment to RCW 60.28.011.  Here's the text of the addition to the RCW:

"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 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.  The contract bond must remain in full force and effect until, at a minimum, all claims filed in compliance with chapter 39.08 RCW are resolved."

Complex Implementation Issues:  Implementing the new law is a complex subject and I have outlined below some of the many issues that public agencies will need to consider in consultation with their attorneys.  My apologies for the length of this blog entry, but there are many issues to cover.

Effective Date:  SHB 1384 is not explicit about whether it is effective only for new contracts awarded on or after July 22, 2011, or whether it also applies to current contracts for which payments will be made to contractors on or after July 22, 2011.  However, given the fact that WSDOT has been in negotiation with USDOT for a number of years about whether Washington needed to comply with the federal retainage regulations, my sense is that the intent of the legislation is that it would be effective for any payments made on or after July 22, 2011 and not just for new contracts. 

Changes in Payment Bonds:  Public agencies in Washington State using federal transportation funds on public works projects (those "involving the construction, alteration, repair, or improvement of any highway, road, or street") will need to be aware of at least three issues related to payment bonds:

• Protect State Agencies with Payment Bonds:  One of the impacts of SHB 1384 is that all of parties protected under retainage (subcontractors, suppliers, workers, and the state Departments of Revenue, Employment Security, and Labor and Industries) must be identified as protected parties in the payment bond.  Currently, payment bonds do not provide protection for the three state agencies.  Thus, payment bonds for projects funded by federal transportation funds must be modified to include Revenue, Employment Security, and Labor and Industries as protected parties.

• Duration of the Payment Bond:  According to SHB 1384, the payment bond "must remain in full force and effect until, at a minimum, all claims filed in compliance with chapter 39.08 RCW are resolved."  The parties listed in chapter 39.08 RCW as being protected by the payment bond are described as "laborers, mechanics, and subcontractors and material suppliers."  Thus, payment bonds will need to include language indicating how long the bond remains in effect.  From my perspective, what is not addressed by SHB 1384 is whether the payment bond must also remain in effect until any claims filed by either the departments of Revenue, Employment Security, or Labor and Industries are resolved.  These agencies are not listed as claimants under chapter 39.08 RCW.  Public agencies may want to consider having the payment bond remain in effect until all claims (private and public) are resolved, even though the new law doesn't appear to address the public claims from the state agencies.

• New Payment Bonds for Current Projects?  If public agencies determine that SHB 1384 applies to any payments on current projects made on or after July 22, 2011, the agencies would need to pay future retainage to the contractors and obtain a revised payment bond adding the departments of Revenue, Employment Security, and Labor and Industries as protected parties under the bond.  And, of course, some agencies may interpret SHB 1384 as requiring release of previously held retainage on current projects.

Changes in Contract Language:  Contracts affected by SHB 1384 will need to delete standard language requiring the withholding of retainage (or obtaining a retainage bond) and replace it with language describing that the parties normally protected by retainage will, instead, be protected by the payment bond.  Depending on how public agencies interpret the effective date of the new law (current contracts or only new contracts entered into after July 22, 2011), there may need to be change orders executed deleting the retainage requirements.  It is my understanding that WSDOT has developed revised specification language to address SHB 1384, but I haven't seen or reviewed such language.

Impact on Projects with Partial Federal Funds:  If a public agency has a public works project that is funded partially with federal transportation funds, and partially with state, local, or other federal funds, does the new law still apply?  The language of SHB 1384 is that it applies to public works projects "funded in whole or in part by federal transportation funds."  Thus, even if only part of the project is funded with federal transportation funds, the requirement to not withhold retainage would apply.  The general principle on the applicability of federal requirements is that any federal money brings with it all of the federal requirements.  This is certainly what applies when it comes to the applicability of federal prevailing wages.

Potential Impacts of the New Law:  While SHB 1384 is a necessary step in order to ensure that the state continues to receive federal transportation funds, there are some potential impacts that may materialize, including the following:

• Different Process for Collecting on Claims:  Claims by subcontractors, suppliers, and workers against retainage are decided by the courts.  With the new law, such claims will be protected by the payment bond.  Thus, claimants, instead of going to court to collect on claims, will need to make their claim to the bonding company and attempt to collect from the surety.

• Public Agency Rights Eliminated:  Under RCW 60.28.021 dealing with retainage, after all claims have been resolved, "the public body may withhold from the remaining retained amounts for claims the public body may have against the contractor."  However, under the new law, the payment bond is only designed to protect the parties described in RCW 39.08.010 ("laborers, mechanics, and subcontractors and material suppliers") and the three state agencies (Revenue, Employment Security, and Labor and Industries).  It appears that the interests of public agencies have been eliminated in SHB 1384.  In theory, a public agency could contractually require the payment bond to include this protection for the agency in the event of claims.

• Increased Bond Costs:  Under SHB 1384, the cost of a payment bond premium to contractors may increase based on additional financial liability to bonding companies, an added cost that may be passed onto public agencies.  Bonding companies may pick up additional liability in two areas:  1)  Prior to SHB 1384, 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 the new law, with no retainage, claims would go directly against the payment bond, thus increasing the  potential liability of bonding companies.  2)  Prior to SHB 1384, a payment bond only protects subcontractors, suppliers, and workers subject to prevailing wages.  Under SHB 1384, three state agencies are added as protected parties under the payment bond, thus increasing the financial exposure of the sureties.

• More Bonds Required for Subcontractors?  SHB 1384 does not prohibit contractors from withholding retainage from subcontractors.  Even though they may continue to do so, with the added financial exposure of bonding companies (see paragraph above), it is possible that sureties may begin to require contractors to also obtain bonds from their subcontractors in an effort to limit their added financial liability under the contractor's payment bond.  If this occurs, it would be unfortunate.  The impetus for the federal regulations and the new law on not withholding retainage is to ensure prompt payment to contractors, but it may result in some subcontractors not being able to participate on public works projects funded with federal transportation funds because of their inability to obtain a payment bond.  The ability to obtain bonding has historically been a problem for small, disadvantaged, minority, and women owned businesses.

Practical Tip:  Consult with your attorneys in making decisions on how to implement SHB 1384.  Please contact me if you have questions, comments, or different approaches or thoughts on this new law.

Mike Purdy's Public Contracting Blog 

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