Tuesday, August 23, 2011

When Should Retainage and a Bond be Obtained?

For most public agencies, at least in the State of Washington, retainage must be withheld and a payment and performance bond obtained for any public works project.

Prevailing Wages on Non-Public Works:  But there are some contracts that may not fit the definition of a public work (RCW 39.04.010) that require the payment of prevailing wages.  The quest is whether retainage should be withheld and a payment bond obtained on these contracts.

Some examples of contracts that fall into this category include the following:
  • Building Service Maintenance:  Workers on Public Building Service Maintenance contracts must be paid prevailing wages according to RCW 39.12.020, even though such work is not a public work.  According to WAC 296-127-01308, these workers include janitors, utility janitors, waxers, and window washers.
  • Maintenance Performed by Contract:  According to RCW 39.04.010, "maintenance when performed by contract" is subject to prevailing wages.  There are different opinion as to whether this work is a public work or only subject to prevailing wages, but that is another discussion.
How Are Workers Protected?  Some agencies take the position that work subject to prevailing wages that does not constitute a public work, should not have retainage and bonding provisions.  In taking such a position, it is important to evaluate the risk.  One of the purposes of retainage and a payment bond is to protect workers subject to prevailing wages.  Thus, while the work might not be a public work, if it is subject to prevailing wages, how will the workers be protected in the event of a claim that prevailing wages were not paid?  Without withholding retainage and obtaining a payment bond, a public agency may be at risk of paying unpaid prevailing wages to workers on these contracts.

Lack of Clarity:  One of the challenges of deciding whether to require retainage and a payment bond on these non-public works projects that require payment of prevailing wages is that Washington state law is less than crystal clear on this point.
  • Bond:  RCW 39.08.010 actually requires a bond for all "work."  "Work" is fairly broad and could reasonably be interpreted to refer to work subject to prevailing wages that is not a public work.
  • Retainage:  RCW 60.28.011 states that retainage is required for "public improvement contracts."  A "public improvement contract" is not defined.  One could make the argument that a "public improvement contract" in chapter 60.28 RCW is the same as a "public work" defined in chapter 39.04 RCW, although there is no explicit connection between the two.
What's the Answer?  In making a decision on whether to require retainage and a payment bond for prevailing wage work that is not a public work, public agencies should look at the following issues:
  • Understand the purpose of retainage and payment bonds
  • Evaluate the agency's potential financial exposure if retainage and payment bonds are not required
  • Assess the ability of businesses who do this work to obtain a payment bond
  • Assess the impact of withholding retainage on the cash flow of businesses
  • Note the dollar amount of the contract
  • Note the duration of the contract work
  • Estimate the number of workers who will be performing on the contract
  • Evaluate the amount of work required by the agency and business to administer retainage and bonding requirements.
Consult With Your Attorney:  A conservative position would be to require retainage and a payment bond on work subject to prevailing wages that is not a public work.  Some agencies, however, choose to take a more flexible approach in making this determination.  Make sure you work with your attorney in making a decision on this important issue for your agency.

Mike Purdy's Public Contracting Blog 
© 2011 by Michael E. Purdy Associates, LLC 

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