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.

Stephanie Holmberg is an attorney in the Portland office of Schwabe, Williamson & Wyatt PC. Contact her at 503-796-2953 or sholmberg@schwabe.com.

This column is intended to provide readers with general information and not legal advice. Consult professional counsel for help regarding specific situations.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

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Pacific Northwest skylines have been transformed by the visionaries who operate in our region’s commercial real estate (CRE) and construction industry. While it has seen considerable growth, industry veterans know from experience that it is crucial to stay on top of one’s business, preparing for resilience (and even vitality) during periods of economic change.

This past summer, Schwabe, Williamson and Wyatt PC commissioned a survey and received insights from more than 700 CRE and construction leaders about the state of the industry. Schwabe then released in partnership with Kinesis – an organization that helps companies in the built industry maximize their potential through marketing and cultural transformation – a report summarizing the findings. The data shows that almost 75 percent of CRE and construction leaders have a strong degree of confidence in the local economy, the industry, and their individual companies. Key findings centered on opportunities for continued growth, but also on preparation for a market shift and talent management.

Growth for the future

The survey respondents reported a strong growing economy and population growth in the Pacific Northwest as advantages to doing business here. And the data shows that our region has several growth opportunities for CRE and construction businesses – namely technological innovation, regional growth outside of downtown cores, and increased diversity of projects.

Technology continues to allow for innovation that increases transparency and efficiency, enabling companies to grow their businesses – assuming they can harness technology to their advantage. While mobile apps, innovative building materials (e.g., cross-laminated timber) and the internet of things are currently being used, the industry plans on digging into predictive analysis and real-time market comparable software in the future. While the cost of new technology can seem prohibitive, the data suggests that more and more, companies are embracing technology to facilitate growth.

Portland will continue to see more projects; however, Hillsboro is identified as the next major metropolitan area outside of Portland for growth. Given the increase of companies in that area and the availability of land as compared to Portland proper, it is no surprise that this area is ripe for continued expansion.

When the survey respondents were asked what projects the industry was focused on, they indicated an increase in infrastructure, private-public partnerships, affordable housing, and data centers. Twenty-five percent of respondents said they’d be working on fewer retail, hotel and amusement projects in the coming year.

Making the market work for a business

While confidence in the market is high for the industry, the data reflects room for concern. More than half of the survey recipients believe a market correction could arrive as soon as 2020. Not surprisingly, challenges to business like local politics, regulations and taxes are top of mind. The rising cost of doing business was the top listed concern for the industry. Coming in second was the ability to attract and retain good employees; preparing for the next downturn came in third.

To prepare for a market correction, industry players are watching their bottom line, diversifying their clients and projects, being more selective about the projects they take on, and implementing hiring freezes or layoffs.

This data suggests some tension between the current and future markets. With cost of business being high and concern over a coming market shift, controlling costs and watching the bottom line make sense. However, businesses are struggling to attract and retain top talent, which tends to make up a large part of the bottom line. The industry will need to carefully balance increasing efficiency, cutting costs, and investing in top talent to weather a potential shift.

Building a talent foundation

Talent management makes up three of the top five most commonly reported business concerns for this industry, including attracting and retaining strong employees, the cost of employee health care and other benefits, and training and succession planning challenges.

Despite more than 74 percent of the industry reporting a challenge with recruiting and retention of skilled talent, 90 percent of companies report that they have an employee-friendly culture. Another 84 percent report that they have good workplace conditions, perks and amenities. This tension may be a reflection of data that is self-reported, with a large number of respondents being from the executive level.

In Oregon, 58 percent of CRE and construction companies plan to hire more full-time employees in the coming year, which means the talent market will likely remain competitive. In order to attract and retain skilled talent and stay on track with growth and market shifts, businesses should consider exploring innovative methods of employee recruiting, training and retention – such as focusing on diversity or communicating their mission and values in the hiring process.

The Pacific Northwest is still in a period of rapid development, and if the data in this survey is correct, the region will continue to see growth, though tempered by market shifts. CRE and construction companies should take advantage of the benefits of the region to mitigate against a potential economic slowdown and best position their companies for the long term.

A full copy of the report can be downloaded at .

Stephanie Holmberg is the leader of the real estate and construction industry group at Schwabe, Williamson & Wyatt. She focuses her practice on construction law. Contact her at 503-796-2953 or sholmberg@schwabe.com.

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President Trump dealt a major blow to the construction industry earlier this month when he signed an order imposing stiff tariffs on steel and aluminum imports, at 25 percent and 10 percent, respectively. While imports from Canada and Mexico are specifically exempted from the order, other big exporters of these materials now face new costs.

Delivering on a campaign promise to defend the domestic steel and aluminum industries, Trump stated his rationale for issuing the order is to promote national security and lower the trade deficit. However, those objectives may come at a cost to industries that rely on these materials, such as construction.

According to the Associated General Contractors (AGC), the tariffs will “put tens of thousands of high-paying construction jobs at risk, undermine the president’s proposed infrastructure initiative and potentially dampen demand for new construction projects for years to come.” Whether those propositions become a reality remains to be seen, but these tariffs will – at the very least – change how developers, contractors and material suppliers prepare for large-scale construction projects.

Contractors already engaged in fixed-price contracts involving steel or aluminum may now become engaged in disputes over which party – owner, contractor or supplier – must pay for any price escalation. These disputes will be driven based on the contractual obligations already in place between the parties. However, moving forward, contractors entering into new contracts with owners and suppliers have a few ways they can contractually protect themselves from price uncertainty resulting from the new tariffs or other future government action.

For example, when contracting with an owner, a contractor can request inclusion of a price escalation clause in a contract. This type of clause requires that the contract sum be equitably adjusted by change order in the event of a significant material price increase (provided the increase is through no fault of the contractor – as is the case of the new tariffs). “Significant” may be contractually defined as a cost increase over a certain percentage, to give the owner some certainty as to total cost in the event of a dramatic price change. Oftentimes these costs will be tied to an industry pricing index to ensure uniformity. Parties can also agree to include a formal notice requirement, to ensure contractors give owners adequate notice of such increases so owners can plan accordingly.

Another way for a contractor to limit exposure is by drafting a custom provision that specifically addresses price escalation of steel and aluminum. Similar to the general price escalation clause, this provision can outline when it applies (for example, when the price of steel goes up more than a certain percentage) and what happens (for example, the owner may opt to terminate the contract entirely, or agree to suspend for a particular duration), but can also include other negotiated outcomes so that it is clear what the parties intend to happen in the event of price volatility caused by the new tariffs or other unexpected events.

Contractors should also pay careful attention when drafting other contractual provisions that involve a potential delay in performance; with material price volatility comes the risk of a material shortage, which in turn can cause a project to be delayed. The prime contract with the owner and the material supply contract with the supplier should both outline which party is liable in the event of a material delay or shortage. And the contractor should carefully review and consider any liquidated damages and consequential damages provisions – both create exposure for the contractor in the event of a performance delay.

Regardless of which contractual protections are put in place, now – more than ever – it is important that any key provisions included in the prime contract between the owner and general contractor flow down, when appropriate, to contracts with subcontractors and material suppliers. When it comes to price escalation and potential delay, having all parties playing by the same rules is the most effective and efficient way to address issues that may come down the pike.

In this uncertain political and economic landscape, Benjamin Franklin’s old adage that an ounce of prevention is worth a pound of cure rings true. It is a good idea to get these provisions drafted now so that contractors are prepared to address these new tariffs’ impacts, whatever they may be.

Stephanie Holmberg is a Schwabe, Williamson & Wyatt shareholder. She practices in its real estate and construction group. Contact her at 503-796-2953 or sholmberg@schwabe.com.

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Along with timely completion, payment is one of the most important aspects of any project. The frequency of payment disputes between project owners, prime contractors, subcontractors and material suppliers has increased as projects that started when the economy bounced back are coming to a close.

Payment timeline requirements

Oregon law requires all parties to construction agreements to adhere to prompt payment obligations. Failure to comply with even the smallest detail of these requirements can potentially expose parties to thousands of dollars in penalties. While a whole treatise could be written on this topic, following is a look at some of the key aspects of Oregon’s prompt payment scheme for private construction projects, along with some discussion regarding issues raised by prompt payment rules.

On almost all private construction projects, a project owner must make progress payments to a prime contractor no later than 14 days after the date a billing is received. Final payment must be made no later than 7 days after the project owner approves the prime contractor’s work.

An owner may make progress payments or final payment later than the 14-day/7-day time periods if the owner provides drawings and specifications that expressly state that an extended payment period is allowed. The project owner must also identify the extended payment period as a specific number of days after the date that the billing is received or the owner approves the work.

One frequently overlooked requirement of an alternative payment timeline is that the timeline information must be on each page of project drawings and specifications. The owner may assume that codifying its agreement with the prime contractor regarding payment timelines in the construction contract is enough. Repeating that agreement on each page of the drawings and specifications may seem unnecessary, but it is required by law.

One way an owner can plan for compliance with this requirement is to have a stamp made (with blanks provided for the number of days that can be filled in later, depending on the project) that includes the required language regarding alternative payment timelines. Using a stamp makes providing specific information on each page less onerous.

In terms of payment from the prime contractor to its subcontractors, if a subcontractor has performed in accordance with a construction contract, the prime contractor must pay its subcontractor within seven days of its receipt of payment from the project owner for work performed by the subcontractor.

The same is true for payments from prime contractors to material suppliers. And the same rules apply down the project chain – for example, a subcontractor must pay its lower-tier subcontractors and suppliers within seven days of receiving payment from the prime contractor.

Arising questions

While prompt payment rules give detailed direction to owners and contractors in some respects, how they apply in certain specific factual scenarios is unclear.

One issue that occasionally arises is whether a party must adhere to prompt payment rules if an accounting or clerical error is made in creating the applications for payment (i.e., billings). For example, what happens if the prime contractor presents to the project owner that 50 percent of a subcontractor’s work is complete and the project owner issues payment to the prime contractor accordingly, only to find out later – but before the prime contractor has issued payment to the subcontractor – that the percentage completion was listed in error? Does the prime contractor have to comply with prompt payment timelines even though the subcontractor is not entitled to payment for that work?

To further complicate things, what happens if the prime contractor issues a credit back to the project owner, based on the inadvertent accounting/clerical error? Is the prime contractor still on the hook for issuing payment to the subcontractor within seven days? These questions are not addressed expressly in the current statutory scheme.

There are other issues surrounding prompt payment. For example, what happens if a prime contractor discovers defective work performed by its subcontractor after being paid by the owner but before the seven-day time period expires? And what if a prime contractor, subcontractor or material supplier fails to meet other contractual obligations of a construction contract? How does that impact prompt payment obligations?

Penalties for noncompliance

Project owners, prime contractors and subcontractors should all pay very close attention to prompt payment rules because one violation subjects the offending party to paying at least 1.5 percent interest on the unpaid balance per month (or fraction of a month) until it is paid. More importantly, any action, claim or arbitration brought to collect such interest entitles the prevailing party to be awarded its costs and attorney fees. Plaintiffs are increasingly tacking on prompt payment claims against owners and prime contractors to their other substantive claims, in a strategic attempt to recover attorney fees – significantly increasing exposure for liability.

Given the complexity of prompt payment rules, it is always best to contact a construction attorney anytime you are faced with a payment issue. Which prompt payment rules apply (e.g., public, private, contractual), whether a violation has occurred, and how best to react in the event of a violation are complex questions that require specific, strategic answers.

Stephanie Holmberg is an associate with Schwabe, Williamson & Wyatt. She practices in its construction and design group. Contact her at 503-796-2953 or sholmberg@schwabe.com.

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According to the U.S. Census Bureau, the Portland metropolitan area in July 2015 had an estimated 2.4 million residents. For perspective, that means Portland increased by 111 residents per day over the course of one year. This growth in Portland has come with unique challenges, particularly for the construction industry racing to keep up with housing and other infrastructure needs for new residents.

In October 2015, the Portland City Council unanimously declared a housing emergency, signaling a renewed effort to address homelessness, provide affordable housing options, and bolster laws that protect renters’ rights. At the same time, maintaining Portland’s position as a leader in environmentally-sustainable building practices continues to be a priority for the city.

Last month, the Portland City Council unanimously approved a 1 percent construction excise tax (CET) recommended by the Portland Housing Bureau. The CET – which will be implemented on Aug. 1 – is estimated to generate about $8 million per year and will aid in supporting both affordable housing and homeownership projects in Portland. Earlier in the year, the Oregon Legislature lifted its 17-year moratorium on inclusionary housing laws, such as this one, which paved the way for cities and counties across Oregon to adopt excise taxes like Portland’s that support affordable housing programs.

The revenue generated by the tax will be broken into two categories: residential and commercial. Of the funds generated by residential construction, the state requires that 15 percent be directed to homeownership programs, 50 percent to developer incentives for inclusionary zoning, and the remaining 35 percent toward housing programs. Inclusionary zoning is a policy framework that incentivizes developers to build housing for low- and moderate-means tenants, whether through exceptions to density requirements allowing for more units to be built or by waiving certain timeline requirements so developers can build more quickly. Of the funds generated by commercial construction, the state requires 50 percent to go to housing programs.

Despite broad acknowledgment of the housing crisis in Portland, the City Council’s approval of the CET has brought criticism. Some industry groups have expressed concern regarding how quickly the council moved on approving the tax, noting the unintended, negative effects the tax might have on the cost and pace of development. However, from a functional standpoint, Portland developers already pay plenty of “system development charges” (SDCs) for various reasons, and this CET does not function much differently. The question remains whether it will have a chilling effect on development.

In addition, in February, the Portland City Council adopted an ordinance, including code language, which requires projects seeking a demolition permit of a house or duplex to fully deconstruct that structure if it was built in 1916 or earlier or is a designated historic resource. “Deconstruction” is a way to remove structures that keeps valuable materials out of the landfill, protects health, creates pathways to construction careers, and generates affordable reusable building materials. Only certified deconstruction contractors will be able to perform this work, and at least one person currently employed by a firm must be certified in order for the firm to be certified. Certification requires successful completion of a one-hour skills assessment, an online written examination, and 500 hours of experience in any of 10 core-competency areas.

After the code changes take effect on Oct. 31, 2016, approximately 33 percent of single-family demolitions will be subject to the deconstruction requirement. The city of Portland says the increased deconstruction will divert 8 million pounds (4,000 tons) of materials for reuse (annually), create job opportunities that act as a pathway for construction careers, and increase the likelihood of discovering materials containing lead and asbestos for safe removal and disposal.

Ultimately, the new CET and deconstruction requirements are likely just the first of many changes to come in the Portland construction and development industries, given Portland’s steady growth. Only time will tell how these changes shape the existing housing landscape and whether the goals intended by these shifts are achieved. Developers and contractors should start thinking now about how these measures may affect their immediate business decisions as well as long-term objectives. While the legal implications of these measures may not be readily apparent, knowing that projects are going to cost more will be an important consideration when deciding whether to enter into new projects and in making decisions about risk exposure.

Stephanie Holmberg is an associate with Schwabe, Williamson & Wyatt. She practices in its construction and design group. Contact her at 503-796-2953 or at sholmberg@schwabe.com.

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One of the most important risk-shifting provisions in a construction agreement also tends to be one of the most confusing: ��the indemnity provision. While the basic concept of contractual indemnity is simple enough to understand – for example, one party obligates itself to pay for damages incurred by the other party under certain circumstances – it gets more confusing when there are statutes governing its effect.�� In Oregon, the statute that governs indemnity provisions in construction agreements is ORS 30.140, and its interpretation has been subject to a long history of legal analysis.�� This article discusses the most recent court decision regarding the purpose and effect of that statute.

Last month, in Montara Owners Association v. La Noue Dev. LLC, the Oregon Supreme Court decided that poorly-drafted indemnity clauses are still partially enforceable if they can be limited so they comply with the indemnity statute.�� In other words, courts will not disallow an entire indemnity clause simply because part of the indemnity clause is overbroad and impermissible.

In this case, a homeowners association sued a general contractor and developer for damages caused by design and construction defects in a townhome complex. The contractor then sued several of its subcontractors who performed work on the project. Before trial, the contractor settled with the homeowners association and all but three of the subcontractors.�� It was a dispute with one of those subcontractors that gave rise to the Oregon Supreme Court decision.

The contractor made a claim against the subcontractor seeking to enforce an indemnity provision in the subcontract between the parties. The indemnity clause in question required the subcontractor to indemnify the contractor for multiple horrors, “whether or not caused in part by [contractor], [its] employees or agents, but ‎excepting that caused by the sole negligence of [contractor], [its] employees or ‎agents‎.”

The trial court determined that the indemnity provision violated Oregon’s indemnity statute, ORS 30.140. The statute has two parts. The first subsection bars overbroad indemnity provisions – those that require one party to indemnify another party for damage “caused in whole or in part by the negligence of the indemnitee.” In this case, both the contractor and subcontractor agreed that the indemnity clause was overbroad and violated the first part of the statute.

However, the parties disagreed over the effect of the second subsection of the law. That subsection provides that the statute “does not affect any provision in a construction agreement” that requires indemnity where the injury or damage arises out of the fault of the indemnitor. The contractor argued the second subsection of ORS 30.140 is an exception to the first subsection.�� The subcontractor took the opposite position and argued that ORS 30.140 sets out two mutually-exclusive categories or construction agreement indemnification provisions – one of which is enforceable, the other of which is unenforceable.

On appeal, the Oregon Court of Appeals reversed the trial court’s decision because it agreed with the contractor that ORS 30.140(2) acts as an exception to ORS��30.140(1). In other words, even though an indemnity provision is void under ORS��30.140(1) because it is overly broad, it may still be enforceable and hold the indemnifying party accountable for injuries or damages that result from its own fault.

The subcontractor next asked the Oregon Supreme Court to weigh in. The Court ultimately upheld the Court of Appeals’ decision and ruled the indemnity clause at issue to be partially enforceable.

The Court reasoned that, “By including the phrase ‘[e]xcept to the extent provided under subsection (2)” in subsection (1), the Legislature intended that the subsections would overlap rather than be mutually exclusive.”�� The Court decided that unenforceable parts of an indemnity clause can be severed, and the remainder of a given clause can be enforced.�� The Court also concluded that “the legislature intended that a subcontractor remain liable for the subcontractor’s negligence even though subsection (1)��protects the subcontractor from having to indemnify a general contractor for the general contractor’s negligence.”

Oregon courts have now definitively spoken regarding the effect of these two subsections of ORS 30.140: ��an indemnity provision in a construction agreement that requires both parties to be liable to the other for their own fault will be enforced regardless of whether another part of the indemnity provision attempts to require more.�� In other words, if you break it, you buy it.�� But if the other person breaks it, you are not required to pay for it.

What this decision also means is that parties to a construction agreement should pay careful attention to the language in an indemnity provision.�� Regardless of whether it includes some parts that may be unenforceable, depending on the remainder of the text, the provision may still pass legal scrutiny and obligate your company to indemnify.�� The best practice is to have your attorney review the indemnity provision so you have a clear understanding of your company’s exposure.

Stephanie Holmberg is an associate with Schwabe, Williamson & Wyatt. She practices in its construction and design group. Contact her at 503-796-2953 or at sholmberg@schwabe.com.

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