OP-ED: Challenges Presented by 'New' Retention Laws and Hope for Clarity
Daily Journal of Commerce
Anyone familiar with the construction industry knows that retainage – or money held back from payment until a later time – is a tool that project owners and general contractors have long used to protect against contractor nonperformance or other project risks. By contractually agreeing to hold back a portion of the money due to a contractor (typically from a progress payment) until completion, a project owner or general contractor can provide an incentive for a downstream contractor to perform its contractual obligations throughout the project until the very end, when the money is then released. Until January 2020, whether and how to withhold retainage could largely be determined by the parties to a construction contract.
That all changed in January 2020, when new laws went into effect that impact the treatment of retainage on private and public construction projects over $500,000. For all construction projects in Oregon entered into on or after Jan. 1, 2020, with a price of more than $500,000, whether public or private, ORS 279C.570(2) and ORS 701.420(2) (b) require an owner, general contractor, or subcontractor to hold the amounts deducted as retainage into an interest-bearing escrow account. The interest on the retainage accrues from the date the payment request is made until the date the retainage is paid to the contractor or subcontractor to which it is due.
Regardless of the initial intent behind these laws, their implementation has created some confusion in the construction industry. For example, neither set of laws designates for which party the retention is being held. Based on the laws’ purpose and intent, one argument can be made that the retention is payable to the party that has already earned it through performing the work that is the subject of the progress payment. But again, that detail is unclear.
As another example, the requirement to keep the retention in an interest-bearing escrow account may be difficult to implement. Escrow accounts may not be easy to establish or administer for retention being withheld on a construction project. Finding a banking institution willing to provide this type of service also may be challenging. In addition, requiring an escrow process triggers specific duties of an escrow agent and triggers administration processes that may not be appropriate (or needed) for all construction projects, especially those of smaller scope and scale.
For public projects, one way some public agencies are adjusting to these “new” laws, which have been in effect for two years but seem unsettled, is to ask the contractor whether it wants retention funds to go. Specifically, ORS 279C.560(2) authorizes a “contracting agency that holds moneys as retainage under [ORS 279C.570(7)] [to either]:
(a) hold the moneys in a fund and pay the moneys to the contractor in accordance with [ORS 279C.570]; or
(b) at the election of the contractor, pay the moneys to the contractor in accordance with subsection (4) or (5) of this section and in a manner authorized by the director of the Oregon Department of Administrative Services.”
ORS 279C.560(5) states, “If the contractor elects, the contracting agency shall deposit the retainage as accumulated in an interest-bearing account in a bank, savings bank, trust company or savings association for the benefit of the contracting agency.” So, the agency may give the contractor a choice, and it has been reported that in many cases contractors opt to hold the money in a fund under ORS 279C.570(2)(a), which means the specific escrow requirement does not apply.
On the private side, owners and contractors of all tiers have worked together to find creative solutions to these issues. For example, parties have agreed to structure progress and final payments in a way that makes withholding “retention” unnecessary. Parties also may enter into contractual addenda that change the legal requirements for withholding retention or at least modify the administration details (whether those addenda are actually legally enforceable may be a topic for another article!). Also, parties may simply choose not to comply with these new laws – perhaps even after receiving legal advice to the contrary.
To make implementation of these laws easier and more palatable to both owners and contractors, several seasoned Oregon construction attorneys have come together and formed a working group to discuss these issues and make recommendations for future legislative action to clear up the requirements of these new laws. The working group is comprised of Oregon construction attorneys, representatives from trade organizations, and industry service providers.
This group’s current plan is to propose new legislation during the next legislative session, and specific draft language is now being considered by legislative counsel. At its root, the proposed new system would abandon retention requirements and instead substitute a retention bond program, much like the program used in Washington state. At the end of the day, the group’s goal is to come up with laws that work at all levels of the contracting chain so that projects are built in a way that is fair and cost-effective across the board.
This column is intended to provide readers with general information and not legal advice. Consult professional counsel for help regarding specific situations.
Column first appeared in the Oregon Daily Journal of Commerce on December 16, 2022.