Guarantees, Bonds, and Retainage

Bid Bonds & Bid Guarantees

A bid guarantee, also known as a bid deposit or bid security, is a monetary deposit that public works contractors often must submit to local governments along with their bids. Bid guarantees discourage successful bidders from backing out of a contract and also help compensate local governments for the extra costs of re-bidding a project or awarding the contract to a higher bidder if the initial low bidder fails to execute the contract.

The bid guarantee amount is typically 5% of the total contract amount that could be awarded, including additive and alternate bids and sales tax. (Different local governments have different bid guarantee requirements, which are set forth in each agency’s enabling statutes. Some agencies may not be required to collect bid guarantees under state law, but 5% is the industry standard.)

The most common form of bid guarantee is a surety bond, or bid bond. In addition to providing protections for the local government in case the successful bidder backs out, a bid bond also indicates that the bonding company or surety has screened the financial capability of the bidder and determined that the bidder represents a reasonable risk.

Below are some of the most common bid guarantee requirements – but as noted later, these might not apply to small works roster contracts depending on how the agency’s statutes are written:

Bid Guarantees and Small Works Roster Contracts

Depending on how an agency’s authorizing statutes are worded, bid guarantees might not be required for small works roster contracts, since there is no reference to bid guarantees in RCW 39.04.151-.152.

For instance, we have concluded that bid guarantees are not required for city or town small works roster contracts, because those statutes reference the small works roster statutes "in lieu of" their regular bidding procedures that include bid guarantees. See RCW 35.23.352(4) for second class cities, towns, and (via RCW 35A.40.200) code cities.

Similarly, we have concluded that bid guarantees are not required for county small works roster contracts because the small works roster statutes are "in lieu of" or "an alternative to" the normal county bidding procedures that require bid guarantees. See RCW 36.77.075 for county road contracts, RCW 36.32.235(14) for non-road contracts in counties with a purchasing department, and RCW 36.32.250 for non-road contracts in counties without a purchasing department.

Alternative Forms of Bid Guarantees

As noted above, bid bonds are not the only form of bid guarantee authorized in state law. However, there are certain risks of using other forms such as cashier's checks, certified checks, postal money orders, or cash.

With a bid bond, a surety has conducted a financial review of the contractor. If alternative forms of bid guarantees are being used, the local government does not have an independent source to determine the contractor's financial stability. This may also affect the surety's willingness to provide the required performance and payment bonds if the bidder is awarded the contract.

Cash and check bid guarantees must be deposited to the agency's accounts upon receipt. (Advice from the State Auditor's Office has indicated that otherwise there is no assurance that the funds are actually available.)

After the bid opening, the awarding agency should hold the bid guarantees of the two lowest responsible bidders and return the bid guarantees belonging to all other bidders as soon as practical in the form of a check written to each contractor (to provide an adequate audit trail).

If the lowest bidder enters into the contract, the guarantee for the second-lowest bidder is returned, again in the form of a check for audit purposes.

If the lowest bidder fails to enter into the contract, their bid guarantee is forfeited and the contract is awarded to the second-lowest bidder according to the procedures in each agency’s enabling statutes.

Example

• Snohomish County Bid Deposit/Bid Bond Form (2023)

Performance and Payment Bonds

RCW 39.08.010 generally 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.

Contracts Under $150,000

Performance and payment bonds are optional (at the agency's discretion) for small works roster contracts under $5,000. See RCW 39.04.152(5).

For any public works contracts of $150,000 or less that 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 RCW 39.08.010(3).

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.

Design-Build Contracts

For public works design-build contracts, a performance and payment bond is only required for the construction portion of the contract and must be in an amount not less than the dollar value of the construction portion of the contract. The performance and payment bond must be provided before the start of construction and no later than 10 days after request from the public agency.

Performance and payment bonds are not required for the portion of the contract that includes design services, preconstruction services, and other services that are not public works construction.

See RCW 39.10.330(7) and RCW 39.08.030(2).

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 (RCW 39.08.030).

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).

Example

• Clark Regional Wastewater Contract Payment and Performance Bond (2024) – Bond form for contract principal and surety to sign

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 Excise Tax Advisory 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.

For contracts under $150,000, the contractor may request a public agency to withhold 10% retainage in lieu of performance and payment bonds, as discussed earlier.

Most public improvement contracts require retainage. However, federally funded transportation projects must rely solely on performance and payment bonds instead; see RCW 60.28.011(1)(b).

Small Works Roster Contracts

For small works roster contracts under $5,000, retainage is optional (at the agency's discretion).

For all other small works roster contracts, retainage is required but the awarding agency may reduce or waive the retainage requirements and assume liability for the contractor's nonpayment, taxes, increases, or penalties. For small works contracts awarded through a bid solicitation, notice of any retainage reduction or waiver must be provided in the bid solicitations.

See RCW 39.04.152(5).

Subcontractor Retainage Bonds

A subcontractor may request the contractor to submit a retainage bond to the agency for the portion of the subcontractor's retainage.

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 our page on Public Works Project Closeout.