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With construction contract negotiations under way for new projects in 2014 and beyond, all involved parties should take notice of Oregon’s revised construction retention statutes.

Revisions effective Jan. 1, 2014 to Oregon Revised Statutes 279C.555, 701.420 and 701.430 provide that on both public and private projects, an owner or contractor or subcontractor may withhold as retainage an amount equal to not more than 5 percent of the contract price of the work completed. Previous law allowed up to 10 percent of the contract price to be withheld as retention to ensure completion of contract performance and the project, unless a performance bond had been posted.

The stated purpose of Senate Bill 405 in halving the retention rate was: 1, to facilitate prompter payment for subcontractors, and 2, to cut down on subcontractor mechanic’s liens filed prior to project substantial completion due to an earlier scope of work. The bill meant to address increasingly contentious situations at the end of construction projects where the owner or lender is often retaining a significant portion of the contractor’s profit until the contractor can deliver occupancy and a lien-free project. While the enacted law’s purposes may have been aimed at prompting resolution, the more common law of unintended consequences may force meaningful and potentially costly changes to project behaviors on both sides of the contract.

At the outset of a project, private owners may increasingly require performance bonds from contractors, and contractors may require from their subs, to ensure project completion. Which party bears the increased costs of this bonding will become a serious point for negotiation among an owner and competitive bidders at the time of contracting.

During a project, owners will be more reluctant to release portions of retention at certain points of completion (e.g., 50 percent of retention when the contractor is 50 percent complete with the project), a practice that although uncommon had gained traction on certain jobs in recent years. Similarly, prudent owners may not grant requests to release retention at the earlier point of substantial completion, instead wanting to ensure the contractor completes all items on the punch list to the satisfaction and written acceptance of the owner. Finally, a greater importance than ever will likely be placed on the contractor providing conditional and unconditional lien and claim waivers and releases prior to payment of retention, to secure a lien-free completed project.

The effects, positive and negative, of Oregon’s new 5 percent retention rule remain to be seen. Parties negotiating construction contracts should stay mindful of how the new retention provisions may force changes to other contract sections, such as those subjects mentioned above, and how such changes may affect all parties throughout construction of the project. For if the law of unintended consequences teaches us anything when it comes to purportedly corrective legislative action, it is to expect the unexpected.

Andrew Gibson is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9878 or [email protected].