New Requirements for Release of Retainage

Under legislation approved this spring by the Washington State Legislature, three state agencies leapfrogged over the rights of subcontractors and suppliers to tap into retainage funds on public works projects when contractors fail to pay taxes and various premiums.

Retainage refers to the 5% of each progress payment that is held back as a trust fund for certain parties by state and local agencies on public works projects.

Substitute House Bill (SHB) 1555, which became effective on July 26, 2009, addresses three areas related to retainage:

1. Expands the list of state agencies that must be notified of final acceptance of a public works project.
2. Requires public agencies to obtain an approval from additional state agencies prior to releasing retainage to the contractor.
3. Changes the priority order of claims filed against retainage, in the event there are insufficient funds to cover all claims filed.

Notification of State Agencies: Under the previous law, public agencies were only required to notify the Department of Revenue of the completion of a public works project. Under SHB 1555, public agencies are now required to notify Revenue, Employment Security, and Labor and Industries (L&I) for all public works projects over $35,000. The process for notifying Revenue has been in place for years, and Revenue has informally forwarded public agency notices to Employment Security. However, no process is in place for notifying L&I.

On July 24, 2009, L&I issued an e-mail informing public agencies they would not be ready to implement the notification provisions of SHB 1555 until at least October 1, 2009. Thus, without instructions from Labor and Industries, public agencies are left with no choice but to wait for L&I to provide instructions for how to implement the new notification requirement.

Approval from State Agencies: Likewise, prior to the adoption of SHB 1555, public agencies were only required by chapter 60.28 RCW to obtain an approval from the Department of Revenue for payment of state excise taxes by the contractor. Most agencies made it a practice to also obtain a release from the Employment Security Department for payment of unemployment compensation premiums, and many agencies also verified from the Department of Labor and Industries’ website that the contractor and subcontractors were current on paying workers compensation premiums.

Under the provisions of SHB 1555, public agencies are now required to obtain the releases of these three agencies for all public works projects over $35,000. In practice, with Labor and Industries’ notification that they are not prepared to issue releases until October 1, 2009 or later, public agencies should ensure they receive releases from Revenue and Employment Security now, and from L&I once they have developed implementation procedures.

Priority of Claims Against Retainage: Under the provisions of SHB 1555, subcontractors and suppliers lost crucial rights to tap into the retainage, falling behind state agencies. The priority order of claims is important for when there are insufficient funds remaining in the retainage account, and helps determine who gets paid first or at all. The following chart illustrates the changes in the priority order of claims:
Implementation: With the addition of Employment Security and Labor and Industries as beneficiaries of the retainage trust fund, subcontractors and suppliers may find little or no money left in the retainage for a project after state agencies have made their claims. Unlike subcontractors and suppliers, state agencies do not need to obtain a court order before requiring public agencies to disburse retainage funds to them.

The new legislation may discourage subcontractors and suppliers from pursuing foreclosure of their claims against the retainage if there is a lower likelihood of recovering funds from retainage.

Another impact of the new legislation, once fully implemented with notification and approval required from Labor and Industries, is that the process for releasing retainage to contractors may take longer.

I will continue to monitor the impacts and new processes of SHB 1555 and will post information on this Blog as it becomes known.

I am hoping to offer a four hour training workshop on "Public Works Contract Close-out: Bonding, Retainage, and Claims" sometime this fall that will address the impacts of the new legislation as well as other important issues. If you are interested in being notified of this upcoming training opportunity, please contact me, and I will let you know more about where and when this low cost training will be held.