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.
Expands the list of state agencies that must be notified of final acceptance of a public works project.
Requires public agencies to obtain an approval from additional state agencies prior to releasing retainage to the contractor.
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.
Frequently, on public works projects, a public agency will request bids for alternates or additives.
While actual usage of these terms varies between agencies, I would characterize an alternate as an alternate material or method of construction different from what is included in the base bid. An additive, on the other hand, is an additional body of work that the owner may award if there is sufficient funding for it. It's a body of work that isn't critical for the project, but which allows the owner to bring the bid amounts within budget without having to re-advertise the project.
How should a public agency evaluate who is the low bidder? That decision should be based on what bidder is the low bidder on the base bid and the combination of alternates or additives that the owner chooses to exercise. Doing so ensures that the owner receives the lowest price for the work performed and is consistent with most laws that require award to the low bidder.
Depending on which alternates or additives are selected, the order of the bidders could change.This is a cause of concern for some contractors who fear that public agencies may use alternates and additives to manipulate who the low bidder is and to purposely exclude a bidder from receiving the award. A reputable owner should base their decision on award based on what funding is available for the project and what is in the best interest of the project.
Thus, if the owner decides not to award any alternates or additives, the award evaluation would be based on just the base bid and that is all that would be awarded. If, on the other hand, the owner had funding for additive bids 1, 3, and 5, the owner would add up the prices for the base bid and additives 1, 3, and 5 for all of the bidders to determine which bidder was low on this combination.
Some owners prioritize the alternates and additives in order to ensure that it is not possible to pick their favorite bidder. The downside to such prioritization is that it can limit options for what may be best for the project and the funding available.
After making an evaluation and award, it is inappropriate for an owner to later change order an alternative or additive bid into the project, if in so doing it would change the order of who the low bidder was. Such an action would likely result in an audit finding.
There are five key issues that should drive public agency officials in making ethical contracting decisions:
Facts: What are the particular and unique facts of a situation?
Law: How do applicable laws and policies impact a decision?
Appearances: It is critical to evaluate how a particular action will appear and be perceived by others even if it is legal. This is often known as the "front page of the newspaper" test. Will your action likely be good material for a front page story?
Judgment: In making contracting decisions, use your judgment and that of your supervisors and managers.
Trust: Will your decision help or hinder in instilling public confidence in the integrity of the public contracting process?
All five of these factors are important to consider in making ethical decisions. For more information about ethical contracting situations, visit the section of my blog addressing ethics.
The next meeting will be held on October 8, 2009 from 9:00 a.m. to noon at the Northwest Carpenters Facility, 25120 Pacific Highway South, Kent, Washington.
The Pinellas County (Florida) Board of County Commissioners voted on July 21, 2009 to table a motion that would have provided up to 10% local preference points in the County's procurement of consultants, architects and engineers. The matter was referred back to County staff for additional study and to obtain input from a regional committee.
To view the staff report and the proposed ordinance, click here.
Training: Public Works Contracting - Beginning to End
Cost: FREE
When and Where (10:00 a.m. to 2:30 p.m.):
September 8, 2009 (Renton)
September 16, 2009 (Camas)
September 24, 2009 (Everett)
September 29, 2009 (Yakima)
Description: This training will cover the basics of public works contract management for the duration of a project. We will review the role of a contract administrator through roster management, spec development, bidding process, bonding, insurance, prevailing wage, limited public works process, and much more.
Vendors will have the opportunity to meet face to face with over 600 public purchasing managers, supply officers, public works contracting officers, facilities managers, fleet managers and fiscal officers. The trade show is focusing on Sustainability this year.
Register by September 14, 2009 or earlier as the trade show does fill up.
For more than 40 years, I served as a contracting manager for major public agencies in Washington State (City of Seattle, Seattle Housing Authority, and University of Washington), and as an independent consultant providing consulting and training to more than 100 public agencies, industry associations, and businesses across the country on the managing the complex world of public procurement and contracting. In March 2015, I discontinued regular postings to Mike Purdy’s Public Contracting Blog to focus on speaking and writing about U.S. presidential history. My book, "101 Presidential Insults: What They Really Thought About Each Other - and What It Means to Us" was published in June 2019. In August 2022, my second book on the presidents was published. It's entitled "Presidential Friendships: How They Changed History." Please visit www.PresidentialHistory.com where you can sign up for a free email subscription to my Presidential History Blog. I am now entering into a new season of life managing my health as I deal with a lethal and incurable cancer (metastatic prostate cancer). I have written a candid and vulnerable memoir about my wild medical adventure titled “Reflections of an Uncertain Journey.” All my books are available through Amazon, Barnes & Noble, other online outlets, and in local bookstores.
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.
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.
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