Highlighting the updates that affect public and commercial construction contracts

On March 7, 2024, the Oregon legislature enacted a significant change to the state's law on retainage requirements for public and private construction projects. The new law introduces options for contractors to receive full payment of progress payments without retainage and without interest-bearing escrow accounts.

Specifically, HB 4006-A (effective from March 7, 2024) offers much-needed updates and clarification on retainage options for public improvement and large commercial construction projects in Oregon. Here are the key takeaways:

• Both general contractors and subcontractors can now bypass retainage by posting a retainage surety bond.
• Subcontractors have the option to purchase and post a retainage surety bond with the general contractor, who will then post its bond with the owner on behalf of the subcontractor.
• Contractors involved in large commercial and public improvement construction contracts can purchase and post a surety bond with the owner and lender to eliminate retainage from their progress payments. The form of the surety bond is provided in ORS 701.435(4) (2024).
• A contractor can post a retainage surety bond at any time before the final payment under the construction contract. Once the bond is posted, retention will no longer be withheld, and any retention that had been withheld up to that point will be paid to the contractor.
• The costs associated with the surety bonds are to be borne by the party posting the bond.
• As an alternative to the surety bond option, a contractor can choose to have retention withheld (without escrow) and earn market-rate interest.
• The previous requirement for retainage to be deposited in an interest-bearing escrow account has been repealed and is no longer a requirement for contracts entered into after March 7, 2024.
• Contracts created between January 1, 2020, and March 7, 2024, remain subject to the previous law requiring interest-bearing escrow accounts for retainage on construction contracts exceeding $500,000.

HB 4006-A ushers in a new era for the progress payment structure on public and private construction projects in Oregon. For instance, construction contracts incorporating the escrow requirement will need to be modified to reflect the new law. Moreover, project stakeholders will need to be mindful of when their contracts were entered into and utilize a different process (i.e., retainage in escrow account) if the contract was entered into between January 1, 2020, and March 7, 2024. Further, contractors will now have surety bond options and will need to know how to access and utilize them on their specific projects.

As always, it's recommended to consult with a legal professional to understand the full implications of these changes on your specific situation.