What to Consider When Waiving Retainage and Bonds
The small works roster process provides the opportunity for public agencies to waive retainage and payment and performance bonds on applicable projects. A question to consider is, “What is the benefit of doing so?” This blog focuses on why an agency might waive retainage and bonds for a project, and why it may ultimately decide not to.
To address that question, let’s review where the authorization for these waivers is specified.
Additionally, Section 3(b) outlines procedures for limited public works projects under the small works roster. This process allows waiver of both retainage (required in RCW 60.28) and the payment and performance bond (required in RCW 39.08).
RCW 39.08.010 also authorizes the waiver of the performance bond. This authority is for any project under $150,000, but in exercising this option, an agency would be required to hold 10% retainage.
Considerations: The Benefits
The pros of utilizing the waivers have been viewed as described below.
Public agencies tend to look at the waiver opportunities as a way to manage a public works process more expeditiously, saving time, paperwork, and the oversight involved in otherwise requiring retainage and a performance bond.
This can be a great advantage for a busy agency; it keeps their focus on the actual projects that are necessary rather than tending to all the same requirements of larger projects. It can also be an advantage for an agency that does not conduct many public works projects and might find it challenging to manage the processes of retainage and bonds.
There has been some speculation that these waivers also afford contractors who are newer to public works, or possibly small and/or minority/women owned businesses, a better chance to gain experience with public works projects when there are fewer hoops to jump through. As they become more familiar with the public works process in general, these contractors can become more acclimated to the additional requirements of public works contracting in preparation of seeking larger projects. In the process, they can build relationships and a reputation for compliance.
Considerations: The Downside
With such implicated benefits, what then could be the downside? To look at potential negative impacts, it is helpful to review the intent behind requiring retainage and performance bonds.
Retainage, required in RCW 60.28, acts as a trust fund for the protection and payment of:
- The claims of any person arising under the contract; and
- The state, with respect to unemployment compensation premiums, industrial insurance, and taxes, increases, and penalties imposed pursuant to Titles 50, 51, and 82 RCW, respectively, which may be due from the contractor.
Subsequently, liens on retainage may be made for unpaid labor or material suppliers as well as for unpaid state taxes and premiums.
When a public agency waives the contract bond and the contract retainage, the agency assumes liability for any claims that would otherwise be made against these protections. This might unexpectedly lead to a significant claim against the public agency.
In general, if a debt is owed to one of the state agencies that is collectible against retainage, the state 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 public agency or the performance bond. In particular, RCW 51.12.050 makes the public agency responsible for industrial insurance premiums on their projects, so the state department of Labor and Industries (L&I) may attempt to collect in this manner. If the bond is similarly not in place, the public agency could be held liable.
In recent years, legislation has been passed that allows for increased opportunities for waiver of retainage and bonds. The full impact of these allowances, therefore, is not yet known. However, if there are fiscal impacts to the state agencies, accountability could come back to the public agency. As more data becomes available on the impact of these actions, other legislative actions could possibly arise. In the meantime, public agencies may want to affirm how the decision to waive retainage and bonds on certain projects aligns with their perceptions of the impacts, beneficial or otherwise.
MRSC is a private nonprofit organization serving local governments in Washington State. Eligible government agencies in Washington State may use our free, one-on-one Ask MRSC service to get answers to legal, policy, or financial questions.