James Yand | Miller Nash
A recent Washington Bill 5528, sponsored by the Northwest Wall and Ceiling Contractors Association and the American Subcontractors Association of Washington, along with many other industry trade groups, successfully passed the Washington Legislature. The Bill will implement retainage reform to mirror the same retention limits that already exist in public works projects. The percentage withheld by an owner, prime contractors, or subcontractor on a project will be limited to no more than five percent of the project price. The Bill which passed with near unanimous support from both sides of the legislature, is currently awaiting the governor’s signature which is expected soon. This new law, once signed, will go into effect on July 23, 2023, along with other legislation but does not expressly have any retroactive application clause. Although it specifically focuses on construction owners, contractors, and subcontractors who work on private construction projects, it exempts, residential construction (less than 12 single family units) and public works projects. For those impacted, there are specific requirements that they will be expected to fulfill under the new law.
Five Percent Limit on Retention
An owner, contractor, or subcontractor may withhold as retainage an amount up to five percent of the contract price of the work completed for private construction projects. This now mirrors the retention limit in public works projects.
Interest Due
The owner, contractor, or subcontractor must pay interest at the rate of one percent per month on the final payment due to the contractor or subcontractor. The interest commences 30 days after the contractor or subcontractor has completed, and the owner has accepted, the work under the contract. The interest runs until final payment is tendered to the contractor or subcontractor.
If the party does not accept the work or does not notify the contractor or subcontractor of work yet to be performed within the time allowed, the interest required commences 30 days after the end of the 15-day period.
Bond Posted to Release Retention
In lieu of retainage, a contractor or subcontractor may tender a retainage bond not to exceed five percent of the moneys earned by the contractor, which must meet certain specified requirements. Whenever a contractor accepts a bond in lieu of retained funds from a subcontractor, the contractor must accept like bonds from any subcontractors or suppliers from which the contractor has retained funds. The contractor must then release the funds retained from the subcontractor or supplier to the subcontractor or supplier within 30 days of accepting the bond from the subcontractor or supplier.
The purpose of the retention reform bill is to expedite payment of money that is due to contractors and subcontractors for work performed. There will undoubtedly be disputes over whether work has been completed, accepted, and if funds are withheld for noncompliance with the terms of the contract. However, for the majority of projects, like its public works counterpart, it will go a long way to help small business owners and minority contractors gain increased cash flow for labor and materials. As one subcontractor testified during the committee hearings, their business has been waiting for retention to be released on a project for close to five years after work was completed. The most significant impact from the legislation will be to get contractors paid promptly.
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