Sunday, January 27, 2013

Accepting a Bond in Lieu of Withholding Retainage

Many public agencies across the country withhold a certain percentage of each progress payment for public works projects as retainage.   

Different purposes of retainage:  The purpose of the retainage varies.  For some the retainage protects the public agency in the event the contractor fails to perform all of the work satisfactorily.  For other agencies, such as those in the State of Washington, retainage is a trust fund to protect subcontractors, suppliers, workers for being paid prevailing wages, and for taxes due to various state agencies (workers compensation, unemployment compensation premiums, and B&O taxes).

A bond in lieu of withholding retainage:  In Washington state, at the contractor's option, a contractor may submit a retainage bond to the public agency in lieu of having the public agency withhold retainage.  The bonding company, or surety, agrees to stand in place of the retainage that would be typically withheld, and to pay any claims filed.

When may a retainage bond be submitted?  A contractor may submit a retainage bond at any time during the project:
  • Before any work has been performed:  The public agency would then pay the contractor 100% of each progress payment, rather than withholding retainage on each progress payment.
  • Prior to the first progress payment:   The contractor may have performed some work during the first month, but not have been paid yet.  The public agency would pay the contractor 100% of the first and each subsequent progress payment, rather than withholding retainage on each progress payment.
  • During the term of the project:  The public agency, after approving the retainage bond, would release any retainage previously withheld, and pay the contractor 100% of any future progress payments.
  • At the end of the project:  After all work has been performed, but prior to release of retainage through the normal process, a contractor may submit a retainage bond.  After approval of the retainage bond, the public agency would release all retainage withheld on the project to the contractor.
Must a public agency accept a retainage bond?  In Washington state, there are two provisions in RCW 60.28.011 that address whether a public agency must accept a retainage bond submitted by a contractor:
  • Bond and bonding company standards:  The retainage bond must meet standards established by the public agency for the form of the retainage bond and for the bonding company.  A retainage bond that does not meet either of these standards may be rejected by the public agency.  It is a good practice for public agencies to have a standard retainage bond form for use by contractors, and to notify contractors in the bidding documents regarding the standards for the bonding company.
  • Good cause for not accepting a bond:  RCW 60.28.011 states that "The public body shall accept a bond meeting these requirements unless the public body can demonstrate good cause for refusing to accept it."  The question is frequently asked what constitutes "good cause for refusing" to accept a retainage bond as long as the bond form and surety meet the agency's standards.  The answer to this question is not clear.  One reason might be if the surety previously provided a retainage bond on another project and failed to pay appropriate claims against the retainage.  Public agencies should be aware, however, that "good cause" is not defined, but there is a presumption that, upon request of a contractor, the public agency must accept a retainage bond meeting the agency's bond form and surety standards.
Why do contractors often like retainage bonds?  Contractors often like submitting retainage bonds because it helps them manage their cash flow.  Instead of only receiving 95% of each progress payment until some point in the future, they receive 100% of the amount they earned each month.  Retainage bonds are relatively inexpensive for a contractor, costing approximately 1% of the amount of the retainage.

Why do public agencies often not like retainage bonds?  Public agencies often do not like retainage bonds because they may reduce the agency's leverage at the end of the project to collect appropriate paperwork from the contractor, such as Affidavits of Wages Paid from the contractor and subcontractors.  In addition, RCW 60.28.021 provides that after all claims against the retainage from subcontractors, suppliers, workers, and state agencies have been satisfied, the public agency, if they have claims against the contractor, may use retainage for this purpose.  It may be more difficult for a public agency to collect on such claims from a bonding company versus actual retainage that has been withheld by the contractor.

Mike Purdy's Public Contracting Blog 
© 2013 by Michael E. Purdy Associates, LLC

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