The Oregon Legislature has passed Senate Bill 405, which will reduce the maximum amount that any party can withhold from a progress payment as retainage. The new law, which is expected to be signed by Governor Kitzhaber, will take effect on January 1, 2014.
Contractors and subcontractors have been arguing about retainage for over 40 years. Since Oregon's first retainage-related legislation was passed in the mid-1970's - in an effort to quell the dispute – the rule has been that one party to a construction contract could only withhold up to five percent of a progress payment if the other party had obtained a bond guaranteeing payment to all subcontractors, suppliers and laborers. If there was no payment bond in place, the five percent cap did not apply, and the parties were free to negotiate a retainage amount that worked for each side. Over time, the "non-bonded" retainage standard came to be generally understood to be 10 percent of the progress payment amount.
SB 405is a continuation of the retainage debate, and arose from the perceived inequity of withholding greater than five percent, and thereby impacting subcontractors' cash flow, restricting parties' ability to negotiate these terms. Now, regardless of whether a contractor or subcontractor has or is able to obtain a payment bond, the maximum amount that can be withheld from a progress payment is five percent.
It remains to be seen whether owners and contractors will respond by becoming more aggressive in requiring payment bonds – which can have both the effect of increasing a project's costs as well as limiting the type and amount of work that some subcontractors will be eligible to perform – or whether the increased risk of non-payment or non-performance by lower-tier contractors will be "baked in" to projects' costs and risks.
In any event, contractors and subcontractors should be on the lookout for contract language that requires more than five percent retainage, or language that requires certain line items in the project schedule of values that is merely retainage in disguise.