Article | by Gram Leahy

Featured Guest: Ian Campbell, Woodruff Sawyer

Retainage laws in the State of Oregon have recently changed, impacting construction contractors, owners, lenders, and subcontractors by altering the way contract progress payments are managed. The new law mirrors a similar measure in Washington and is anticipated to improve cash flow for contractors and spur growth within the construction industry.

On March 7th, 2024, House Bill 4006 was signed into law which offers contractors an alternative to the traditional practice of retainage. This practice, which is unique to the construction industry, involves the owner or owner’s lender withholding a percentage of the progress payments until the completion of the project. The bill allows contractors to post a retainage surety bond, enabling contractors to receive full payment for their progress payments without the need for cash retainage. The new law also repeals the requirement that retainage be kept in escrow, a requirement that previously led to several legal and practical difficulties for those in the industry.

The newly signed bill was developed and supported by a coalition of industry stakeholders including Woodruff Sawyer’s Ian Campbell. Gram Leahy of Geffen Mesher’s Construction Group sat down with Ian to discuss the key changes and benefits expected from this law change.

Gram: What are the key law changes that both contractors and owners should be aware of?

Ian: Oregon contractors (and now subcontractors) may receive the full amount of their progress payments, without retainage, by posting a specified retainage surety bond with the owner and lender. The current law requiring that retainage be placed in an interest-bearing escrow account has also been repealed. 

Gram: Who is eligible to benefit from this law change?

Ian: The new law permits contractors and subcontractors on “large commercial” (essentially, nonresidential projects) and public improvement construction contracts to purchase and post a surety bond with the owner and lender to eliminate retainage being withheld from their progress payments. The new law applies primarily to construction contracts entered into on or after March 7, 2024. Federal work is not eligible under this statute.

Gram: How does this process functionally work for subcontractors?

Ian: Subcontractors may also purchase and post a retainage surety bond with the general contractor, who in turn will post its bond with the owner and lender on behalf of the subcontractor. The general contractor may post a separate retainage surety bond with the owner and lender for the subcontractor or simply incorporate the subcontractor’s retainage amount in the general contactor’s own retainage surety bond. 

Gram: Is this bond separate/different from traditional performance and payment bonds? If so, how?

Ian: Yes. The retainage bond is a financial guarantee of the retainage amount, and is issued only for the retainage amount that would be otherwise withheld from progress payments to the contractor.  This is different than a Performance and Payment bond, which guarantees the contractual performance of the contractor and that they will pay all of their associated subcontractors and material suppliers on the project.

Gram: Are there any timing requirements or restrictions for posting this retainage bond?

Ian: No. Retainage surety bonds may be posted at any time before final payment for all or a portion of retainage. A retainage surety bond may be issued in the full amount of retention or a partial amount, and may be posted at any time during the project until final payment. Once posted, any withheld retainage must be paid to the contractor or subcontractor.

Gram: What benefits are your contractor clients already seeing from this change?

Ian: Cash Flow, Cash Flow, Cash Flow.  Contractors and subcontractors can now receive full payments for projects from the start.  No more waiting for the Prime (GC)/Owner to declare the project completed before releasing the retainage downstream.  Posting a retainage bond avoids waiting for litigation, liens, claims to be cleared on project, which often delays releasing retainage. 

Gram: What next steps can contractors take to set themselves up to take advantage of this law change?

Ian: The key challenges will be administration, qualification for surety credit, and working with the lender/banking industry to understand the new statute. Contractors need to work with their surety broker and/or insurance broker on establishing a surety program, if they haven’t already. Once the program is established, the broker and the surety will determine program limits (single project/aggregate) and the appropriate rate.  Surety is a credit/financial based instrument and is underwritten accordingly.  So, a quality CPA is almost mandatory to receiving and/or expanding your available surety credit.

Contractors, owners and lenders all need to be aware of the impact this new law may have on their cash outflows if a party they are doing business with posts a surety retainage bond. As the industry navigates this change, it’s recommended that contractors and subcontractors in particular engage with their surety brokers early in the contract process to fully leverage the benefits of the new law. While these changes will likely necessitate some adjustments in contract forms and payment procedures, the hope is that they ultimately provide a more manageable and beneficial system for all parties involved in the construction process.

Have additional questions? Feel free to reach out to Gram Leahy at gleahy@gmco.com or Ian Campbell at icampbell@woodruffsawyer.com

Want to subscribe to the Geffen Mesher Construction Group Newsletter? Email marketing@gmco.com