Retainage from progress payments is commonplace for most Oregon construction contractors. Traditionally, there have been few laws governing retention; almost all of the “rules” were established in the parties’ construction contract. Beginning in 2000, however, all that changed. Now public and private contractors need to take a fresh look at retainage terms for any project of more than $500,000.
New Oregon statutes now provide strict rules for public and private construction contracts in excess of $500,000. Unfortunately, those statutes do not address some practical realities of typical construction projects and can cause legal troubles and costs for those who don’t comply. The statute for private contracts states:
[T]he owner, contractor or subcontractor shall place amounts withheld as retainage into an interest-bearing escrow account. Interest on the retainage amount accrues from the date the payment request is approved until the date the retainage is paid to the contractor or subcontractor to which it is due. (ORS 701.420(2)(b).)
And for public contracts:
[T]he contracting agency shall place amounts deducted as retainage into an interest-bearing escrow account. Interest on the retainage amount accrues from the date the payment request is approved until the date the retainage is paid to the contractor to which it is due. (ORS 279C.570(2).)
Missing from the statutes are answers to at least the following questions:
- What if a contract (or subcontract) initially is less than $500,000 but after change orders exceeds $500,000? Does the statute apply? If so, is retainage already withheld subject to the escrow and interest-bearing requirements? If so, from what point?
- If one or more subcontracts exceed $500,000, do separate accounts need to be established for each subcontractor, as well as for the general contractor?
- Can the parties waive or modify the application of these statutes in their contract?
- Can the parties define an account that is not a true escrow (i.e., opened with a title company or bank with escrow instructions)? Are interest-bearing escrow accounts even available in the marketplace? Do contractors of each tier require their own separate account?
- Is the interest to be paid to the contractor or subcontractor the actual interest earned? Or the contract’s interest rate? Or the rate required by the prompt-payment statutes?
- Is interest paid to be net of the expenses of the escrow account?
- What if an upstream contractor doesn’t receive money to hold as the retention for lower-tier subcontractors? Does the statute require it to pay the subcontractor interest from phantom funds (i.e., the contractor’s own pocket) as if the money had been deposited and earned interest?
- How do the existing prompt-payment acts’ requirements for payment and retention apply to these new statutes?
In many private contracting projects, a lender will not distribute money being held as retention to the owner or to any contractor, so no cash can in fact be deposited in the escrow account. These statutes do not apply to lenders, so lenders typically would not agree to deposit the retention amounts in separate escrow accounts. The statute simply does not contemplate this common scenario.
At present, there are no statutory answers to these questions that a contractor may rely on. Several construction attorneys (including myself) are in the early stages of working with legislators on amendments to these laws in the 2023 Legislative Assembly. If you want to participate or have questions about the process, please feel free to contact me.
In the meantime, construction lawyers have developed strategies to manage these risks and the consequences of not complying strictly with the new retention statutes. These strategies require taking a fresh look at owners’ and contractors’ construction contracts—in particular their retention and progress payment terms. In most cases, negotiation between the contracting parties will be needed to come to acceptable terms that minimize the risks inherent in these laws. Owners and contractors should ask competent construction attorneys to review contracts and prepare appropriate terms.