The Washington State Dept. of Transportation (WSDOT) has introduced draft legislation that would eliminate withholding of retainage on federally funded WSDOT projects. Under the draft legislation House Bill 1384, WSDOT projects would exempt “public improvement contracts involving the construction, alteration, repair or improvement of any highway, road, or street funded in whole or in part by federal transportation funds” from withholding retainage.
The federal government, contrary to the state of Washington, generally withholds no retainage on its construction projects. The federal government reasons that with no retention withheld contractors increase their cash flow by being paid 100% of each progress payments, thus, the federal government will procure its construction at a lower price in the long run. On federally funded projects, general contractor’s creditors must rely on the general contractor’s bond as payment security in the event the general contractor defaults on its obligations.
On present WSDOT projects, the state of Washington requires that the general contractor post both a payment and performance bond which serves a similar function to the federal bond. In addition to the bond, the state of Washington withholds 5% of each progress payment as retainage. Claimants who provide labor, materials, subcontracts and equipment to general contractors are covered by both the general contractor’s payment bond and the retainage fund. Notably, however, the retainage fund extends its coverage not only to persons and companies who provide labor, services, equipment and supplies to the project, but also covers unemployment compensation (Title 50), industrial insurance premiums (Title 51) and state taxes (Title 82 RCW).
WSDOT proposes eliminating the retainage from federally funded projects, but, extending the coverage of the construction payment bond on these federally funded projects in the state of Washington to Titles 50, 51 and 82 RCW (unemployment compensation, industrial insurance and state taxes).
The effect on contractors will be likely being as follows:
1. Increased Bond Premiums. By adding more potential claimants (unemployment compensation, industrial insurance and state taxes) to the coverage of the payment bond will necessarily drive up payments of bond premiums. The added bond premium costs will be passed on to tax payers in the form of higher bids.
2. Prompt Payment Act. Subcontractors, suppliers and those furnishing equipment should feel little effect. The Prompt Payment Act should ensure that the general contractor “flows down” any proceeds that the general contactor receives on behalf of its subcontractors and suppliers. The Prompt Payment Act precludes the general contractor from withholding monies in the form of retention or otherwise from its subtier-subcontractors and suppliers that are paid to the general contractor by the owner.
3. Owners’ Rights in Retainage Limited. The retainage statute specifically provides that retention may only be used for claims of any person arising under the public works contract and for state taxes, which my be due from the general contractor (60.28.011(9)). Therefore, public entities should not be effected by the elimination of retainage (public agencies have no protection under the Retainage Act and therefore never had the right to tap into these funds for reasons other than to pay the general contractor’s creditors and taxes).
4. Increase Cash Flow. Eliminating retainage will provide contractors with greater cash flow which should reduce the cost of public works construction. The effect on reducing public works construction may be minor considering that general contractors and their subcontractors presently have the right to bond the retention and obtain the cash flow for the relative low cost of a retention bond.
5. Without Retention, General Contractors Will Look To Other Forms Of Security. The retainage has, in the past, provided a source of general contractor protection for subcontractor defaults. 5% of the contract amount is set aside by general contractors and can be used in the event a subcontractor fails to perform in accordance with its subcontract obligations. By eliminating this source of “security,” it is anticipated that general contractors will be more inclined to ensure performance of their subcontractors by insisting on subcontractor payment and performance bonds.