Under HB 4006, which was effective on March 7, 2024, the Oregon legislature sought to improve retainage law in two ways. First, it allows general contractors and subcontractors to post a retainage surety bond to avoid having retainage deducted from progress payments on large commercial projects and public projects. Second, it eliminates a 2019 retainage escrow account law that had been a thorn in the sides of many owners and contractors.

It is common for construction contracts on commercial and public construction projects to allow the owner to withhold payment of a certain amount of money from the general contractor’s progress payment applications as “retainage” or “retention.” In Oregon, retainage cannot exceed 5% of the work completed. The general contractor typically includes similar retainage provisions in its contracts with downstream subcontractors. Such retainage provides an incentive to the contractor and subcontractors, respectively, to complete the construction in a timely and satisfactory manner. However, if the contract price is large, retainage of up to 5% can have a significant impact on a contractor’s or subcontractor’s cashflow during construction.

In 2019, the Oregon legislature enacted a law that requires any retainage withheld on a construction contract exceeding $500,000 to be deposited into an “interest-bearing escrow account,” although no interest rate was specified in the statute. While the intent was to benefit contractors and subcontractors by requiring retainage to accrue interest, the law did not solve contractors’ and subcontractors’ cashflow problems during the course of construction. Also, depositing funds into an interest-bearing escrow account requires there to be actual money to deposit. Construction lenders, however, typically do not disburse money withheld as retainage at the time of the progress payment application, but rather wait until the contractor is eligible for payment of retainage before releasing such funds. Even after passage of the 2019 retainage escrow account law, construction lenders were reluctant to change that practice. Thus, often, there were no funds to actually deposit in the required retainage escrow account. Accordingly, compliance with the 2019 law was often difficult at best.

Fast forward to 2024. HB 4006, which applies to multiple statutes, repeals the 2019 escrow account provision effective March 7, 2024. Additionally, for contracts entered into after March 7, 2024, contractors and subcontractors on large commercial projects (having a ground area over 10,000 square feet or a contract price over $250,000) and on public projects can post a retainage surety bond to avoid having retainage taken out of progress payments. The form of the surety bond is provided in ORS 701.435(4)(2024). Under certain circumstances described in the statute, a contractor can withhold the portion of the surety bond premium applicable to a subcontractor’s work from that subcontractor’s progress payments.

The posting of the bond triggers release of prior withheld retainage, as well as eliminates withholding of retainage going forward. And the existence of the bond provides essentially the same protection that owners and contractors otherwise intended through retainage.

As an alternative to the surety bond, a contractor can elect to have the project owner (or public contracting agency) withhold retainage and either deposit the funds into an interest-bearing account or be liable to the contractor for interest on the retained amounts at the rate specified in the statute.

In addition to benefitting construction industry stakeholders, HB4006 will have some practical effects on construction contracts and project administration. Many Oregon construction contract forms were changed to reflect the 2019 law. Now, construction contract forms for applicable projects should be changed again to comply with the new law. Additionally, owners and contractors must make sure that their payment procedures for contracts entered into after March 7, 2024 comply with the new law. Also, contractors and subcontractors will want to review potential retainage surety bond options with their insurance agents. Washington state has had a statutory retainage surety bond option for public projects for some time, and more recently for private projects, so there should be sureties able to provide these types of bonds for Oregon projects, as well.