Progress payments to Oregon contractors (and now, subcontractors) now may be paid in full — without retainage — by posting a retainage surety bond, whether on public or private projects. Even better, the requirement that retainage be kept in escrow has been repealed. An industry-sponsored bill, HB 4006-A, that also had the support of state and local public agencies, was passed by the Oregon Legislature unanimously and became law on March 7, 2024, for new construction contracts. The law updates and clarifies retainage options for public improvement and large commercial construction projects.

The requirement to keep retainage in escrow began in 2020 for construction contracts greater than $500,000, and immediately created confusion and uncertainty at all levels of the construction industry. Retainage is the practice — unique to the construction industry — to withhold up to 5 percent of earned monthly progress payments to contractors until final payment at project completion. Retainage is intended to provide funds, like a security deposit, to ensure successful completion of the contractor’s work. This practice typically cascades down all the contracting tiers, beginning with the general contractor, where the public agency, private owner, or the owner’s lender holds back the agreed-upon percentage from its monthly payments that the general contractor earned the prior month. The general contractor, in turn, withholds retainage from monthly payments to its first-tier subcontractors, who also withhold retainage from their second-tier subcontractors, and so on. Under a 2019 law (House Bill 2415), any party withholding retainage was required to deposit it in an interest-bearing escrow account for the benefit of the contractor.

Although the 2019 law was well-intentioned as a way to provide contractors with interest on their retainage pending completion of the project or, worse, the resolution of claims, it became quickly apparent that these escrow accounts were not available in the marketplace — at least not without substantial costs. Banks and other institutions were not familiar with retainage or the risks of claims against retainage and were unwilling to pay interest on funds held in escrow. For many commercial projects, lenders do not disburse funds for retainage; they simply don’t loan those amounts, so no cash exists to be placed into escrow. The 2019 law did not apply to lenders, who therefore could not be compelled to lend retained amounts to be put in escrow. Many other practical and legal questions arose that also made the 2019 law unworkable. Most owners and contractors negotiated terms to work around the escrow requirement, or just ignored the law.

In 2021, several attorneys from the Oregon State Bar’s Construction Law Section that regularly represent clients in most construction industry segments joined with the sponsors of the 2019 law, Associated General Contractors’ Oregon-Columbia chapter, several union and trade associations, and others to address the confusion. Their research and discussions led to proposed legislation to repeal the escrow requirement and instead streamline the option for a contractor to post a retainage surety bond in lieu of retainage for new public and commercial construction contracts. Then full progress payments would be paid during the project, increasing contractors’ cash flow, but the contractor and its surety would be bound to the owner to pay any claims or costs that otherwise would have been paid out of retention.

Surety professionals confirmed that these bonds are available — they have been in use on public projects in Washington and several other states for several years. In fact, Washington expanded its option for retainage surety bonds to apply to private construction projects in 2023. The new Oregon legislation in many ways tracks Washington’s retainage surety bond option. Contractors who work in both states will now have parallel methods available to avoid cash retainage.

Subcontractors of any tier may also purchase and post a retainage surety bond with the general contractor, who in turn will post its bond with the owner on behalf of the subcontractor. (The general contractor may post with the owner a separate bond for the subcontractor or simply incorporate the subcontractor’s retainage amount in the general contactor’s own retainage surety bond.) This new feature will benefit many small and emerging subcontractors by providing a mechanism to promote cash flow.

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. And the retainage surety bond is not the only option available to contractors. A contractor may choose to have retention withheld (without escrow) and earn market-rate interest.

Owners and public agencies may refuse retainage surety bonds only after making written findings on certain specific grounds that are particular to the project’s circumstances. The costs of retainage surety bonds are borne by the contractor or subcontractor posting them and are not reimbursable costs of the work. Public agencies may deduct from final payment additional costs that the owner incurs because of the posting of the bonds.

Some projects, such as federally funded housing (e.g., HUD), may still require traditional retainage, without the option for retainage surety bonds, but in such instances the retainage will earn market-rate interest.

Contracts currently in effect do not benefit from the new law, which applies only to construction contracts that are entered into on March 7, 2024, or thereafter, for public improvements or large commercial projects — the legislation is not retroactive. Contracts entered between Jan. 1, 2020, and March 7, 2024, are still subject to the escrow requirement. These contracts continue to face the uncertainties of the 2019 law and contractors are urged to consult with experienced construction lawyers familiar with the 2019 law to help decide how best to navigate retention.

HB 4006-A represents more than two years of cooperation between trade associations, unions, public agencies, owners, surety professionals, and construction lawyers from across the state and industry — not a typical industry coalition, especially on the contentious subject of retention. AGC successfully led the charge in the legislature to obtain unanimous approval of the bill. Contractors and subcontractors now have a workable option to be paid full progress payments, instead of waiting months or years for retained funds to be paid after project completion.

Gary Christensen is a Miller Nash LLP partner and a construction lawyer. He co-chaired the coalition that sought to repeal the 2019 law and propose HB 4006-A. Contact him at 503-205-2435 or gary.christensen@millernash.com.

Jeremy Vermilyea is a construction lawyer, arbitrator and mediator with Vermilyea Law PC. He co-chaired the coalition that sought to repeal the 2019 law and propose HB 4006-A. Contact him at 503-482-4186 or jeremy@vermilyealaw.com.

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