Public Agencies May Soon Be Required to Accept Retainage Bonds

Most public works construction projects in Washington require public agencies to withhold a certain percentage of each progress payment as retainage until the completion of the project.  In Washington, retainage of 5% is established as a trust fund for the protection of potential claimants, including subcontractors, suppliers, and laborers.  Once a retainage bond is submitted in lieu of the public agency withholding retainage, any retainage previously withheld is released, and any future payments are for the full amount.

A retainage bond is a type of performance bond that protects the public owner after a project is completed by guaranteeing that the contractor will carry out all necessary work to correct defects discovered after completion of the contract, even if full payment has been made.  Due to an ambiguity in Washington statutes, however some public agencies have been disallowing retainage bonds issued by some of the largest writers of performance bonds.

In the 2013-2014 legislative session, the Washington State Senate unanimously passed Substitute Senate Bill 6110, which would allow a greater selection of bond writers to be available to public owners in Washington State by disallowing a public body’s ability to set its own arbitrary standards for accepting retainage bonds.  SSB 6110 makes two significant changes to Washington’s bonding laws:

  • First, the legislation would eliminate any discretion on the part of a public agency in accepting retainage bonds.  Currently, under RCW 60.28.011, a public body must accept a retainage bond in lieu of withholding retainage unless the public body can demonstrate good cause for refusing to accept it.  SSB 6110 amends RCW 60.28.011 to require public agencies to accept a bond as long as it is issued by an authorized surety insurer with a financial strength rating from A.M. Best Co. of “A?” or higher.
  • Second, SSB 6110 would make the statutory requirement to approve a surety bond applicable to all surety bonds issued in Washington.  Currently, under RCW 48.28.010, a surety bond must be approved and accepted by a court, public official, or public body if it is otherwise proper and guaranteed by an authorized surety.  SSB 6110 amends RCW 48.28.010 to make it applicable to any and all bonds given as security pursuant to any Washington statute, including a retainage bond issued pursuant to RCW 60.28.011.

This legislature adjourned on March 13, 2014, which means that SSB 6110 is “dead.”  However, because this bill moved as far as it did, it will likely be reintroduced in the 2014-2015 legislative session under a new number.  The 2014-2015 legislative session is a long session (105 days vs 60 days), so this it will have more time to move through the process.

Comment: This bill is good news for government contractors.  The government’s retainage can account for a substantial portion of all of the funds for the overhead costs associated with the public project.  By paying the minor costs associated with a performance bond, a contractor can ensure that it is paid earlier.  By removing a public agency’s discretion in accepting and approving the retainage bonds, the Washington State Legislature is poised to provide government contractors with more access to this beneficial bonding practice.

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