Purchasing and Bidding: Retainage and Bonding Issues
Contents
Introduction
For public works projects, a municipal government must withhold a sum of money referred to as retainage from progress and other payments 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 $35,000 that are not processed under the Limited Public Works Process, there is an another exception, described below in the Bonding section of this page.
Retainage and Bonding Overview
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 claims of any person arising under the contract; and the state with respect to taxes imposed pursuant to Title 50 RCW (Employment Secuirty), Title 51 RCW (Industrial Insurance), and Title 82 RCW (Department of Revenue) RCW which may be due from such contractor. A person is defined as a "person or persons, mechanic, subcontractor, or materialperson who performs labor or provides materials for a public improvement contract, and any other person who supplies the person with provisions or supplies for the carrying on of a public improvement contract."
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. Some agencies accept retainage reluctantly, as once the contractor has all his money, provisding project closeout documention becomes less important to the contractor. Contact the MRSC Publi Works Consultant for pointers on how to handle this.
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.
RCW 60.28.011(1)(b) says: "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 shall rely upon the contract bond as referred to in chapter 39.08 RCW for the protection and payment of: (i) The claims of any person or persons arising under the contract to the extent such claims are provided for in RCW 39.08.010; and (ii) the state with respect to taxes imposed pursuant to Titles 50, 51, and 82 RCW which may be due. The contract bond must remain in full force and effect until, at a minimum, all claims filed in compliance with chapter 39.08 RCW are resolved."
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 thirty-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.
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.
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. Most agencies wiill submit the project to the governing body or designated official for acceptace only after all prevailing wage affadavits are on file. 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, Employment Security 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 (or retainage bond), 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 potential claims by DOR, ESD and DLIS, so the agency is not bound to the 60 days unless releases from these agencies are on file. Also, the agency should not release the retainage until it has received a copy of all approved Affidavit of Wages Paid regardless of the 60-day limit.
Before releasing the entire retainage an agency must obtain a certificates of release from DOR, ESD and Industrial Insurance (DLIS) signifying that all applicable taxes, premiums and penalties have been paid (RCW 60.28.051 & RCW 60.28.060).
At the completion of the 45-day limit for filing liens for labor or supplies, the agency can release all the retainage if the DOR, ESD, 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 for the contractor and subcontractors of all levels.
- Certificate of Payment of Excise Taxes by Public Works Contractor from DOR
- Certificate of Payment and Contributions issued by ESD
- L&I’s Industrial Insurance Program approved release