A Win for Contractors in Oregon: New Law Repeals Retainage Escrow Requirements

On March 7, Gov. Tina Kotek signed HB 4006, an industry-sponsored bill, into law. The new law means that progress payments to Oregon contractors and subcontractors may now be paid in full—without retainage—by posting a retainage surety bond on both public or private projects. The law repeals the requirement that retainage be kept in escrow.

HB 4006, which had the support of state and local public agencies, passed Oregon's House and Senate by unanimous vote on February 26. The new law applies to all construction contracts— both public and large commercial private—entered into on or after March 7, 2024.

What Is Retainage?

Retainage is a practice unique to the construction industry that allows the owner or owner's lender to withhold a percentage of the contract value until the completion of the project. Sometimes as high as 10% is retained.

Retainage is intended as a sort of security deposit, providing funds to ensure the successful completion of the contractor's work. It cascades down all the contracting tiers, with the public agency, private owner, or owner's lender holding back an agreed-upon percentage on payments for work the general contractor performed the previous month.

Then, the general contractor withholds retainage from its first-tier subcontractors' contract value. The first-tier subcontractor then withholds retainage from its second-tier subcontractors, and so on.

Under a 2019 law (HB 2415), any party withholding retainage on contracts exceeding $500,000 was required to deposit it in an interest-bearing escrow account for the benefit of the contractor. However, these escrows are not commercially available, so most owners and contractors could not comply with the law. Also, many practical and legal questions about the 2019 law could not be resolved.

For example, banks and other financial institutions unfamiliar with retainage or the risks of claims against retainage were unwilling to pay interest on funds held in escrow. Also, the lenders on many commercial projects do not disburse funds for retainage or loans on those amounts.

The new law repeals the escrow requirement.

A Coalition's Work Pays Off

Since 2021, Woodruff Sawyer has been working with a coalition of attorneys from the Oregon State Bar's Construction Law Section and the Associated General Contractors' Oregon-Columbia chapter as well as representatives from industry unions and trade associations to address the confusion of the escrow requirement.

Our coalition proposed legislation to repeal the escrow requirement and offer the option for a contractor to post a retainage surety bond in lieu of retainage for new public and commercial construction contracts.

When full progress payments are paid during the project, the contractor's cash flow increases. The contractor and its surety are bound to the owner to pay any claims or costs that otherwise would have been paid out of retention.

The new Oregon legislation resembles the State of Washington's retainage surety bond option. Washington expanded its option for retainage surety bonds to apply to private construction projects in 2023.

With the signing of HB 4006 into law, contractors in both states now have legal methods to avoid cash retainage.

The Woodruff Sawyer team of surety bond experts welcomes the new legislation and the growth it will help spur in the construction industry, especially for small businesses in Oregon.

We recommend that contractors engage with their surety brokers early in the contract process to ensure they gain full advantage of the new law. For more information, contact your Woodruff Sawyer representative.