Options for Waiving Retainage and Bonds on Public Works Projects

Editor's note: This blog has been updated to add an additional example of public works contracts of $150,000 or less, in which a contractor may ask the public agency to waive the performance and payment bonds and instead retain 10% of the contract amount as outlined in RCW 39.08.010(3).

When awarding public works contracts, Washington local government agencies have statutory authority to require retainage and bonding from contractors. This provides financial incentive to finish projects and offer protection for involved parties.

Involved parties include the following:

• Subcontractors;
• Workers;
• Suppliers doing work or furnishing materials, supplies, or equipment; and
• State agencies in respect to taxes, increases, and penalties incurred on the project.

For retainage, RCW 60.28.011 requires agencies to withhold up to 5% of the value of a public works contract, not including sales tax, until the project is completed and the contract is accepted. Performance and payment bonds are generally required in RCW 39.08.010 for public works contracts.

For more information, see our page on Guarantees, Bonds, and Retainage.

While having statutory authority for these requirements, local government agencies and contractors can reduce or waive retainage and/or bond requirements for:

• Small works roster contracts; and
• Any public works contract of $150,000 or less.

Let’s review agency considerations when the authorization for waivers exists and the options for waiving retainage and bonds on these types of public works contracts.

Considerations When Waiving Retainage and Bonds

Agencies must weigh the benefits against risks when waiving retainage and bonds. Assessment of project size and potential liability is important when considering these options.

When a local government agency waives retainage and/or performance and payment bonds, the agency assumes liability for any claims that would otherwise be made against these protections. This might lead to a claim against the agency by the involved parties mentioned previously.

For instance, if a debt is owed to a state agency that is collectible against retainage, the agency would attempt to collect such claims from the project retainage. If the retainage is nonexistent or insufficient, the state agency may attempt to claim from the local government agency or the performance bond. In particular, RCW 51.12.050 makes the local government agency responsible for industrial insurance premiums on their projects, so the Department of Labor and Industries (L&I) may attempt to collect in this manner. If retainage or the performance bond is similarly not in place, the local government agency could be held liable.

With the considerations discussed, let’s look at the options for waiving retainage and bonds on certain public works contracts.

Small Works Roster Contracts

The ability to reduce or waive retainage and/or bonds has existed for small works roster contracts for some time. However, effective July 1, 2024, SB 5268 modified options for small works contracts awarded by RCW 39.04.151-.154 for projects below $350,000:

• For small works roster contracts under $5,000, retainage can be waived (at the agency's discretion). Performance and payment bonds can be waived (at the agency's discretion (RCW 39.04.152(5)).
• For small public works contracts more than $5,000, retainage can be reduced or waived (at the agency's discretion). Performance & payment bonds are still required (RCW 39.04.152(5)).

These options could be beneficial for a local government agency that does not conduct many public works projects and might find it challenging to manage the processes of both retainage and bonds. An agency has the option to consider what requirements are necessary based on potential liability, rather than having the same requirements of larger projects.

For contractors newer to public works, especially small and minority- or women-owned businesses, there may be better opportunity to bid when there are fewer requirements and costs to bidding a project. Over time, they can become more acclimated to the additional requirements of public works contracting and eventually seek larger projects. In the process, they can build relationships and gain experience with local government.

Any Public Works Contract of $150,000 or Less

For public works contracts of $150,000 or less, the contractor may ask the agency to waive the performance and payment 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, the Employment Security Department, L&I, whichever is later (RCW 39.08.010(3)).

Below are examples where this may fit:

• A local government agency utilizing minimal competition (below agency bid limit, competitive bidding not required) within this dollar amount.
• A local government agency awarding a small works roster contract between $5,000 to $150,000.
• A local government agency using the small works roster optional direct contracting/negotiation process established by RCW 39.04.152 (4) to award the contract to an individual contractor without competition for a contract estimated cost less than $150,000.

With these examples, the contractor waiving performance and payment bonds and instead retaining 10% of the contract amount potentially saves time, paperwork, and the oversight by both the agency and contractor. 

Which Option Fits Your Project?

Waiving or reducing retainage and/or performance and payment bond requirements for certain public works contracts can allow local government agencies and contractors to complete projects efficiently, as well as limiting agency liability. While these options can streamline processes and lower barriers for contractors, a local government agency with discretion to waive these protections must carefully assess the project size and potential liabilities by doing so.