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SUBJECTS › PUBLIC WORKS › Purchasing and Bidding: Retainage and Bonding Issues
Updated 09/04

Purchasing and Bidding: Retainage and Bonding Issues

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Retainage and Bonding Issues

    For public works projects, a municipal government must withhold retainage and must also have a contractor's performance and payment bond on file. For public works contracts under $35,000, these requirements may be waived under a Limited Public Works Process. For public works contracts under $25,000 that are not processed under the Limited Public Works Process, there is an another exception, described below under Bonding.

    RCW 60.28.011 requires municipal governments to withhold 5% of money due the contractor for a public improvement or work until completion and/or acceptance of the contract. This money is to be set aside as a trust fund for the protection and payment of anyone who performs labor, provides materials, supplies or equipment or subcontracts to the prime contractor. In addition, the State Department of Revenue (DOR) has lien rights against this fund for payment of unpaid taxes under Title 82 RCW and the Department of Labor and Industrial Services (DLIS) has lien rights for non-payment of prevailing wages.

    [Note: Payment of employment security taxes under Title 50 RCW is not covered by the retainage trust fund. See Employment Security Taxes below.]

    [Exception: Contracts funded in whole or in part by the U.S. Farmers Home Administration are not subject to RCW 60.28.011, subsections 1 through 9.]

    RCW 39.08.010 requires municipal governments to call for a performance and payment bond. The bond is to be issued by a surety company licensed to do business in Washington. It is to be conditioned that the contractor shall faithfully perform all the provisions of such contract and pay all laborers, mechanics, and subcontractors and materialmen, and all persons who supply such person or persons, or subcontractors, with provisions and supplies for the carrying on of such work. State agencies (DOR, L&I, ESD) have no direct claim against the bond.

Retainage

    RCW 60.28.011(4) described three options for placement of retained funds until they are released to the contractor. Most agencies require the contractor to indicate his preference on a form at the time the contract is signed.

    RCW 60.28.011(6) allows a contractor to submit a retainage bond for all or any portion of the contract retainage in a form acceptable to the agency and from a bonding company meeting standards established by the public body.

    An agency normally withholds funds in the amount of 5% of each partial payment or monthly progress payment, which are then deposited in the designated account. Note that the maximum retainage is 5%. If it becomes obvious, during the contract, that subcontractors, materialmen or laborers are not being paid appropriately and liens are filed in amounts exceeding the retained amount, the agency cannot withhold additional retainage. As the agency has no contractural relationship with subcontractors, etc., it cannot pay them directly either. Consultation with the agency's legal counsel at this point is essential. One thing that may work is to be assured that the contractor will pay off liens and claims immediately by having him deliver cashiers checks to the agency, to be mailed to claimants at the same time the contractor receives his progress payments.

    At any time (RCW 60.28.011(3)), the contractor may request that the contract retainage be reduced to 100% of the remaining contract.

Bonding

    RCW 39.08.010, as noted above, requires a municipality to call for a performance and payment bond. The penalty for failure to do so (RCW 39.08.015) is that the municipal corporation is liable to the persons mentioned in RCW 39.08.010, to the full extent and for the full amount of all such debts so contracted by such contractor.

    Required performance and payment bonds are normally furnished on agency supplied forms. This form, or any proposed substitute form, should be reviewed by the agency's legal counsel before the contract is signed.

    RCW 39.08.010 states that on contracts of twenty-five thousand dollars or less - at the option of the contractor - the agency may, in lieu of a performance and payment bond, retain fifty percent of the contract amount for a period of thirty days after date of final acceptance, or until receipt of all necessary releases from the department of revenue and the department of labor and industries and settlement of any liens filed under chapter 60.28 RCW, whichever is later. Please note this sample form.

    RCW 39.08.030 provides that the performance and payment (both) bond will be in the amount of 100% of the contract amount, except that cities and towns may by general ordinance fix and determine the amount of the bond. However, the bond cannot be for less than 25% of the contract amount.

    RCW 39.08.030 also provides that anyone who has a claim against the bond must file such a claim within thirty days from and after the completion of the contract with an acceptance of the work by the affirmative action of the board, council, commission, trustees, officer, or body acting for the state, county or municipality, or other public body, city, town or district.

    Further, RCW 39.08.030 provides that claimants shall present to and file with such board, council, commission, trustees or body acting for the state, county or municipality, or other public body, city, town or district, a notice in writing substantially as shown in the statute.

Employment Security Taxes

    Payment of employment security contributions, penalties and interest under Chapter 50.24 RCW is not, directly, required prior to release of the retainage as are prevailing wages and sales taxes. However, RCW 50.24.130 states that a local agency, as an employing unit using contractors, is "liable for such contributions, interest, and penalties and the commissioner shall have all of the remedies of collection against said employing unit under the provisions of this title as though the services in question were performed directly for said employing unit".

    When a agency sends a Notice of Completion of Publci Works Contract to the Department of Revenue (DOR), the DOR sends a copy to the Employment Security Department (ESD) After verifiying that employment security contributions, etc, are current, ESD sends a Certificate of Payment of Contributions, Penalties and Interest on Public Works Contract (EMS 8449 760 R7-84) to the agency and contractor.  This certificate ensures (hopefully) that contractor and subcontractors have in fact paid any taxes due the Employment Security Department, and that the Department has released its lien on the retainage, per RCW 60.28.040.

Project Completion/Closeout

    Chapter 60.28 RCW (retainage) refers to the "completion of all contract work" as the trigger date for the release of retainage. Chapter 39.08 RCW (performance/payment bonds) refers to the "completion of the contract with an acceptance of the work" by the governing body.

    [See also MRSC Contract Closeout Paperwork and Deadline Summary and MRSC Project Closure/Retainage Release Guidelines.]

    Anyone who has a claim against the performance/payment bond must file such a claim within 30 days from and after the completion of the contract and acceptance by the agency's governming board.  Anyone who performs labor, provides materials, supplies or equipment or subcontracts to the prime contractor must file a notice of lien against retainage within 45 days of the completion of all contract work. State agencies, including the Department of Revenue and L& I, are to file notices of lien within 45 days also.

    After completion of all contract work except landscaping, the contractor may request that the agency release the retainage, except for 5% of the moneys earned for landscaping. The agency is to release these funds within 60 days of this request. This requirement, however, is subject to the DOR and DLIS releases described below.

    The agency is to release all retained funds within 60 days after completion of all contract work (not necessarily acceptance by the Council or Commission). This requirement, however, is subject to the DOR and DLIS releases described below.

    The agency should not release the entire retainage until it has received a copy of the approved Affidavit of Wages Paid from the Industrial Statistician of the Department of Labor and Industrial Services (DLIS) regardless of the 60-day limit.

    Before releasing the entire retainage, again regardless of the 60-day limit, an agency must obtain a certificate from the Department of Revenue (DOR) signifying that all applicable use and sales taxes have been paid and that the Department releases its lien rights (RCW 60.28.051 & RCW 60.28.060). The agency fills out Form # RV310020 (1-17-96) Notice of Completion of Public Works Contract and sends it to DOR.

    At the completion of the 45-day limit for filing liens for labor or supplies, the city can release all the retainage if the DOR and DLIS clearances have been obtained and there have been no lien notices filed.

    If notices of liens are filed, but DOR and DLIS clearances have been obtained, the city should be prepared to release all the retainage except that required to satisfy the liens when the 60-day limit for retainage release (RCW 60.28.011(3)(b)) is up.

    As shown in the MRSC Contract Closeout Paperwork and Deadline Summary, anyone who files a lien has four months from the time of filing to foreclose on the lien in Superior Court. State agencies can extend this time, but private companies do not have that same latitude.

    In summary,  an agency should have the following in its files before releasing the retainage:

    Approved (by L&I) Intent to Pay and Affadavit of Presvailing Wages

    Certificate of Payment of Excise Taxes by Public Works Contractor from DOR

      In addtion, although not directly listed in RCW 60.28.011 as required before retainage release, the agency should have the following in its files either before project acceptance or retainage release:

      Certificate of Payment of Contributions, Penalties and Interest on Public Works Contract (EMS 8449 760 R7-84) (see Employment Security Taxes).

      Employer Liability Certificate from L&I

        L&I has set up a Web based method that allows local agencies (and anyone, actually) to check for payment of industrial insurance premiums. By working through the various screens, an agency can verify that the contractor is current on his/her payments and print an Employer Liability Certificate that will alert L&I that the agency made a bona-fide effort to verify payment of industrial insurance premiums. If the contractor is not current on his/her premiums, then the agency should contact the account representative listed on the Certificate.

        Again, while not directly convered by retainage and /or the payment/performance bond, contract acceptance and final payment should not be made until the contractor brings his employment security and industrial insurance premiums current for at least the agency's project. 

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