Wednesday, December 5, 2012

When Should Retainage be Released if a Retainage Bond Has Been Submitted?

Most public works construction projects require public agencies to withhold a certain percentage of each progress payment as retainage.  But what happens when an agency accepts a bond in lieu of withholding retainage?  When should retainage then be released (or not withheld)?

Release retainage after approval of bond:  When a contractor submits a bond in lieu of the public agency withholding retainage, it may be submitted anytime (prior to work beginning, prior to first payment, during the term of the contract, at the end of the project).  Once a retainage bond has been approved by the public agency, any retainage previously withheld should be released, and any future progress payments should be for the full amount, without retainage being withheld.

Washington state law:  Here's what RCW 60.28.011 (6) states about retainage bonds:
A contractor may submit a bond for all or any portion of the contract retainage in a form acceptable to the public body and from a bonding company meeting standards established by the public body. The public body shall accept a bond meeting these requirements unless the public body can demonstrate good cause for refusing to accept it. This bond and any proceeds therefrom are subject to all claims and liens and in the same manner and priority as set forth for retained percentages in this chapter. The public body shall release the bonded portion of the retained funds to the contractor within thirty days of accepting the bond from the contractor. Whenever a public body accepts a bond in lieu of retained funds from a contractor, the contractor shall accept like bonds from any subcontractors or suppliers from which the contractor has retained funds. The contractor shall then release the funds retained from the subcontractor or supplier to the subcontractor or supplier within thirty days of accepting the bond from the subcontractor or supplier.
Have your own bond form:  It's a good practice for agencies to have a standard retainage bond that must be used by contractors. This helps to ensure that the language in the bond is sufficient to adequately protect the agency's interests.

Retainage purpose and amounts vary:  The purpose and amount of retainage varies by state.  In Washington, retainage of 5% is established as a trust fund for the protection of claimants (subcontractors, suppliers, workers subject to prevailing wages, and various state agencies for payment of taxes and premiums).

Mike Purdy's Public Contracting Blog 
© 2012 by Michael E. Purdy Associates, LLC

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