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Guarantees, Bonds, and Retainage

This page provides a general overview of bid guarantees, retainage, and performance and payment bonds for public works contracts administered by local governments in Washington State. It is part of MRSC’s series on Public Works Contracts.

New legislation: Effective July 23, 2017, new legislation addresses subcontractor retainage bonds and performance and payment bonds for contracts of $150,000 or less. See below for more details.


Bid Guarantees

Bid guarantees, also known as bid bonds or bid deposits, are monetary deposits that contractors must submit along with their bids, in order to discourage successful bidders from backing out of a contract. The guarantee amount is typically 5% of the total contract amount that could be awarded, including additive and alternate bids, and sales tax.

Different local government agencies have different bid guarantee requirements, which are set forth in each agency’s enabling statutes. Many agencies are not required to collect bid guarantees. Below are some of the most common bid guarantee requirements:

  • Code cities, second class cities, and towns: All bids must be accompanied by a bid guarantee of at least 5% in the form of a cashier’s check, money order, or surety bond (RCW 35.23.352).
  • First class cities: Bid guarantees are not required by statute, but almost all first class cities require them.
  • Counties: All bids must be accompanied by a bid guarantee of 5% in the form of a cashier’s check, money order, surety bond, certified check, or cash (RCW 36.32.250).
  • Port districts: All bids must be accompanied by a bid guarantee of at least 5% in the form of a cashier’s check, money order, or surety bond (RCW 53.08.130).
  • Water/sewer districts: All bids must be accompanied by a bid guarantee of at least 5% in the form of a cashier’s check, certified check, money order, or surety bond (RCW 57.08.050).
  • Fire districts: Bid guarantees are not required by statute.

To see your agency's specific bid guarantee requirements, use MRSC's Find Your Contracting Requirements tool.

All bid guarantees must be deposited to the agency's accounts prior to the bid opening. The bid guarantees belonging to the unsuccessful bidders must be returned as soon as practical after the bid opening in the form of a check written to the contractor (to provide an adequate audit trail).

The awarding agency should hold the bid guarantees of the two lowest responsible bidders. If the successful bidder fails to enter into the contract, the bid guarantee is forfeited and the contract is awarded to the next-lowest bidder, according to the procedures in each agency’s enabling statutes. If the lowest bidder enters into the contract, the guarantee for the second-lowest bidder is returned.


Retainage and Retainage Bonds

RCW 60.28.011 requires agencies to withhold up to 5% of the value of a public improvement contract, not including sales tax according to Department of Revenue ETA 3024.2013, as retainage until the project is completed and the contract is accepted. This provides a financial incentive for contractors to finish a project, as well as a limited amount of financial protection for the involved parties.

Normally, 5% of each contract payment is withheld, and the money must be set aside one of three ways, chosen by the contractor:

  • A public fund
  • A private interest-bearing account
  • A private escrow account

Instead of having retainage withheld from the contract payments, a contractor may opt to submit a retainage bond instead covering any or all of the amount. Local governments must accept these retainage bonds unless they can demonstrate a good reason for refusing.

A contractor may request that the retainage be reduced to 100% of the value of the remaining contract, realistically when at least 95% of the contract has been paid.

The only public improvement contracts that do not require retainage are federally funded transportation projects, which must rely solely on performance and payment bonds instead.

Subcontractor Retainage Bonds

Effective July 23, 2017, a subcontractor may request the contractor to submit a retainage bond to the agency for the portion of the subcontractor's retainage. (See ESHB 1538.)

The contractor may withhold the subcontractor's portion of the bond premium. Within 30 days, the contractor must submit the retainage bond to the agency, unless the bond is not commercially available or the subcontractor refuses to pay the subcontractor's portion of the bond premium and to provide the contractor with a like bond.

The agency shall accept such a retainage bond from an acceptable bonding company, unless the agency can demonstrate good cause for refusing to accept it.

Retainage Release

The agency must release the retainage to the contractor after the project is completed, minus any claim amounts. All workers, subcontractors, and suppliers have lien rights against the retainage and can claim all or part of the money if the contractor does not pay them. In addition, the Department of Revenue, the Employment Security Department, and the Department of Labor and Industries all have lien rights against the retainage for payment of unpaid excise taxes, industrial insurance/workers' comp, and unemployment compensation.

For information about claims and retainage release, see Project Closeout.


Performance and Payment Bonds

RCW 39.08.010 requires public works contracts to use performance and payment bonds to guarantee that the contractor or the surety itself will complete the project and pay all subcontractors, workers, and suppliers. If the retainage is not enough to cover claims and unpaid fees, the performance and payment bonds will cover the remaining amount.

Unlike retainage, state agencies have no direct lien rights against these bonds, unless the project is funded in whole or in part by federal transportation funds, or unless the bond was conditioned upon the payment of other outstanding taxes or penalties.

Performance and payment bonds must usually be in the amount of 100% of the contract value. Cities and towns may set a bond amount between 25% and 100% by ordinance (RCW 39.08.030), and some other agencies have their own statutory requirements. Many agencies will ask for separate performance and payment bonds for 100% of the contract amount, doubling the coverage.

These bonds are normally furnished on agency-provided forms, which should be reviewed by the agency’s legal counsel and risk manager before the contract is signed. Cities, towns, and water-sewer districts may require the bond be payable to the agency itself. For all other local governments, the bond must be payable to the State of Washington.

Performance and payment bonds may be waived for roster projects under $35,000 using the limited public works process.

Effective July 23, 2017, for public works contracts under $150,000 that do require performance and payment bonds, the contractor may ask the agency to waive the bonds and instead retain 10% of the contract amount for 30 days after the date of final acceptance, or until the receipt of all necessary releases from the Department of Revenue and Department of Labor and Industries, whichever is later. (See SB 5734.) Previously, the thresholds were $35,000 and 50% of the contract amount.

This is intended to help small contractors that may have trouble getting a bond. Prevailing wage claims have priority if there are multiple claims on retainage.

Examples

  • Kirkland Ordinance No. O-4586 (2017) - Updating the purchasing policy to reflect the new requirements of SB 5734 pertaining to retainage and performance and payment bonds.
  • Shoreline Ordinance No. 793 (2017) - Makes several updates to purchasing code, including dollar threshold for small public works roster projects (RCW 39.04.155), new bond/retainage legislation (SB 5734), and job title of purchasing officer

Claims Against Performance and Payment Bonds

Any subcontractors, workers, and suppliers with a claim against the bond must file the claim within 30 days after the agency accepts the contract. If a municipality fails to call for performance and payment bonds, it will be liable to all of those entities for the full amount of the contractor’s debts or outstanding payments (RCW 39.08.015).


Last Modified: May 10, 2018