Wednesday, September 3, 2014

Will Public Agencies Be Required to Accept Retainage Bonds?

In Washington state, a contractor may submit a bond to a public agency in lieu of the agency holding 5% retainage from every progress payment.

Current state law:  The current state law (RCW 60.28.011) requires that a public agency must accept a retainage bond from the contractor, "unless the public body can demonstrate good cause for refusing to accept it."  It has always been somewhat unclear exactly what this exception means.  I have often stated that the one condition that may be "good cause" for not accepting a retainage bond is if a surety refused to previously honor claims against a retainage bond on a different project.

Agency practices:  Some public agencies have made it a practice to not accept any retainage bonds, regardless of whether they have determined "good cause" for not accepting such bonds.  This has become a matter of concern for contractors and bonding companies, and led to the introduction of new legislation.

Proposed legislation:  Substitute Senate Bill 6110, which unanimously passed the Senate on February 12, 2014 would remove the discretion that public agencies currently enjoy in deciding whether to accept a retainage bond or not. The bill did not, however, come up to a vote in the House, presumably because it ran out of time to be considered.

Impact of SSB 6110:  SSB 6110 would do two things:
  • Require acceptance of retainage bonds:  The current "good cause" discretion public agencies have would be repealed and agencies would be required to accept any retainage bond as long as the surety has an A.M. Best rating of "A-" or higher.
  • Remove agency discretion on Payment and Performance Bonds:  The proposed legislation would also require public agencies to accept Payment and Performance Bonds from sureties without some of the review that currently is part of the process, such as relating to the A.M. Best rating of the surety and other conditions.
2015 legislative session:  Presumably, SSB 6110 will be reintroduced in the 2015 legislative session.  Given its unanimous approval in the Senate in 2014, there is a high likelihood that the bill may be approved and become law in 2015.

Is SSB 6110 a good idea?  In my opinion, SSB 6110 is a short-sighted solution that does not address some of the real issues surrounding retainage and bonding on public works projects.  In addition, it strongly favors the interests of contractors and sureties, without taking into account the interests of public agencies (and the public) subcontractors, and suppliers.
  • Eliminates options and protections:  Without some ability on the part of public agencies to refuse to accept a retainage bond from a surety who has not faithfully paid claims on previous retainage bonds, SSB 6110 has the impact of eliminating the rights of subcontractors and suppliers from collecting payment from the retainage (and state agencies on USDOT funded projects where no retainage may be withheld). Thus, the statement in RCW 60.28.011 that retainage is a "trust fund" for protected parties becomes an empty shell.   
  • Eliminates protections for the public:  The amendments to RCW 48.28.010 in SSB 6110 eliminates discretion by public agencies in assessing whether a surety is financially secure to post a Payment and Performance Bond or Retainage Bond.  This shift of balance in favor of sureties over public agencies and the protection of the public is not good public policy.
A contractor's view:  Seattle attorney Matt Paxton of Ahlers and Cressman has written a blog posting on SSB 6110, noting that from a contractor's perspective the bill would be beneficial.  Mr. Paxton's definition of a retainage bond, however, is really more the definition of a warranty bond.  A retainage bond does not guarantee "that the contractor will carry out all necessary work to correct defects discovered after completion of the contract, even if full payment has been made."  Rather, a retainage bond guarantees that the surety will pay subcontractors, suppliers, and workers who have not been paid by the contractor.  Click here to read Mr. Paxton's blog.

What will happen in 2015?  Without public agency opposition to SSB 6110, this bill has a good chance of becoming law.  Public agencies that are concerned about it should work with their lobbyists and associations to discuss the impacts of the bill further.
Mike Purdy's Public Contracting Blog
© 2014 by Michael E. Purdy Associates, LLC


Matt Paxton said...

Hi Mike. Thanks for the shout out. Interestingly, I borrowed my definition of a retainage bond from the Washington State Legislature's bill reports for SSB 6110. I agree that a project's retainage is designed, in part, ensure payments are made to subcontractors, but there is really a dual purpose for withholding a percentage of the contract amount. Owners can and do refuse to release the retainage until it is satisfied that the general contractor has completed the contract.

Mike Purdy said...

Hi Matt, I didn't realize that the bill report had that definition for retainage bond in it, and think such a definition is misleading. RCW 60.28.021 provides that "public body may withhold from the remaining retained amounts for claims the public body may have against the contractor" only after all claims from others, including state agencies, have been satisfied. This occurs after completion of all work. It is the only reference in Chapter 60.28 RCW to how a public body may use retainage for its own purposes.