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Oregon law about retainage on public and private construction projects changed on March 7, 2024. Contractors now have a workable option to obtain full payment of progress payments, without subtraction of cash retainage.

The good news: no more retainage escrows!

The better news: general contractors (and now subcontractors) may avoid retainage altogether by posting a retainage surety bond.

The requirement that retainage on many projects be deposited in interest-bearing escrow accounts—which owners and contractors found impossible to obey—is repealed. A consortium of construction industry participants and attorneys worked on legislation for more than two years to find a better solution. The result, HB 4006, unanimously passed the 2024 special session, eliminating the escrow requirement for construction contracts created on or after March 7, 2024. (The statute is not retroactive, however. Previously existing contracts created after January 1, 2020, remain subject to the escrow requirement.)

Instead, Oregon law for public and commercial construction contracts was expanded to allow contractors to avoid cash retainage altogether by posting a new “retainage surety bond” for the equivalent amount.

New retainage surety bonds

The new law permits contractors on “large commercial” (essentially, nonresidential projects of more than 10,000 square feet or $250,000) and public improvement construction contracts to purchase and post a surety bond with the owner and lender to eliminate retainage from their progress payments. This surety bond is separate from traditional performance or payment bonds and applies only to retainage that would be withheld from progress payments to the contractor.

The specific form of the retainage surety bond is provided in the new statute. ORS 701.435(4) (2024).

A contractor may post a retainage surety bond at any time before final payment under the construction contract. Once the bond is posted, retention will no longer be withheld and any retention that had been withheld to that point will be paid to the contractor.

The premium and other costs of retainage surety bonds are to be paid by the party posting the bond. Whether those expenses can be considered a cost of the work—and therefore recoverable in the contractor’s pay applications—is a matter of negotiation on commercial projects, but public agencies are not responsible for bond procurement costs incurred by the contractor after bids are submitted.

Subcontractors may post bonds

Further, subcontractors may now 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 a separate bond with the owner 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.

Washington similarly offers retainage surety bonds

There is an existing market for retainage surety bonds in the industry. Both Oregon and Washington now have similar retainage surety bond options. In 2023, Washington extended its retainage bond program for public projects to commercial construction. Contractors working in both states will have similar options to avoid cash retainage.

Existing contracts must still address escrow requirements

Contracts created between January 1, 2020, and March 7, 2024, are still subject to the 2019 law requiring interest-bearing escrow accounts for retainage on construction contracts that exceed $500,000. Many owners and contractors have developed terms or processes to address that requirement, but all the legal and practical questions remain about how that statute would be interpreted and whether parties can “contract around” it.

One new question is whether contracts, subcontracts, or work orders now issued under a master construction contract that was created during 2020-2024 are subject to the old law or the new one. Competent construction counsel can assist with options to address this and other legal issues surrounding the treatment of existing and new construction contracts.

New vs. existing contracts

Owners, lenders, and contractors should consider how HB 4006 will change their progress payment procedures. Lenders, for example, must disburse the full amount of a progress payment for those contractors or subcontractors who have posted a bond. Most construction contract forms will need modifications, especially if adaptations were made after 2020 to work with (or around) the escrow requirement. But dual processes will be in place until the contracts entered into from January 1, 2020, to March 7, 2024, are closed out. Overall, however, the new statute provides clarity and workability to retainage that was for a time missing.

Please contact us with further questions about the new retainage law.

Gary Christensen was co-chair of the committee that drafted HB 4006.

This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.

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