Last year, my colleague Matthew Berry wrote for the Daily Journal of Commerce an article that described the Oregon Legislature’s failed attempt to address the issues linked to the “escrow account” requirement included in House Bill 2415, which was enacted in 2019.Under that requirement in ORS 701.420(2)(b), retainage on private and public construction projects with contract prices exceeding $500,000 was required to be placed in an “interest-bearing escrow account.”

The concept of retainage, also called retention, is well-accepted in the construction industry. To reduce the risk that a contractor will fail to perform its contractual obligations in a timely and full manner, an owner can withhold a percentage of payment (that is, retainage) from progress payments to contractors until construction has been satisfactorily completed.

Notwithstanding its shortcomings, House Bill 2415’s intent reflects valid critiques of retainage. The use of it can, and often does, place significant financial strain on contractors, particularly subcontractors who perform work early in the construction process. They may be unable to recover their complete contract price until many months later, when the overall project reaches designated contractual milestones. As a result, such companies are essentially financing a portion of the total cost of construction through interest-free retainage on labor, equipment, and materials until the job has been completed to the satisfaction of the owner. This is particularly harmful on larger, multiyear projects.

Not surprisingly, subcontractor associations supported the escrow account requirement since retainage (and the interest on retainage) was not being timely paid. Opponents of the bill worried, however, that an escrow requirement would create administrative issues by, among other things, adding complexity and cost. Unfortunately, those concerns quickly turned out to be a reality for many.

Following passage of HB 2415 and implementation of the escrow requirement, many financial institutions proved unwilling to open escrow accounts for retainage without charging substantial fees — fees that often exceeded the amount of retainage interest. Claim disputes over retainage quickly expanded from whether it (and how much) was owed to whether retainage was being held in a statutorily compliant “escrow account” — and whether the owner, contractor, or subcontractor should be responsible for paying associated “escrow account” fees.

Recognizing these issues, the Oregon Legislature introduced House Bill 2870 during the2023 legislative session. As presented, the bill proposed to amend the retainage framework by eliminating the “escrow account” requirement and otherwise entitling contractors and subcontractors to submit a retainage bond (also called a release of retainage bond) in lieu of the retainage on all construction projects. These amendments would have made Oregon’s retainage laws like the longstanding framework in Washington state (RCW 39.08.010,60.28.011). The bond in lieu of retainage option would allow contractors and subcontractors to avoid waiting to recover their complete contract price until after the project was completed. Instead, if a contractor or subcontractor submitted a retainage bond, the owner or contractor could assert retainage-related claims directly against the retainage bond itself.

Despite broad support and favorable testimony, the Oregon Legislature was unable to pass HB 2870 before the conclusion of the 2023 session. Perhaps building off momentum gained during last year’s session, the Legislature looked to take up the escrow account requirement issue again. House Bill 4006 was introduced in 2024 with nearly identical text to that of HB2870. Like its predecessor, HB 4006 eliminates the escrow account requirement and provides contractors and subcontractors an option to submit a retainage bond in lieu of all retainage on construction projects.

At any time before final payment for work on large commercial structures or public improvement contracts, a subcontractor may submit a surety bond to the contractor and request release of that portion of retainage that pertains to the subcontractor. This newly created option for subcontractors generally addresses the longstanding critiques of retainage and allows subcontractors to obtain full payment for their work before the project is complete. The benefits of the retainage bond option for subcontractors will be particularly appreciated on projects that span multiple years when the subcontractor performs work only in the early stages.

HB 4006 also creates an alternative to a retainage bond while avoiding the pitfalls of the escrow requirement. If a contractor or subcontractor does not deposit a retainage bond, the company may elect to have the owner deposit the accumulated retainage in an interest-bearing account with a bank, or pay interest on the retainage at the rate of 2 percent plus the discount rate on 90-day commercial paper in effect at the Federal Reserve Bank on the date the retainage is paid. So even if a surety bond is not obtained by the contractor or subcontractor, owners will no longer be required to place retainage in an interest-bearing escrow account.

House Bill 4006 received unanimous approval in both the House and Senate, and Gov. Tina Kotek signed it into law on March 7. It was enacted on an emergency basis, so it became effective immediately.

This column is intended to provide readers with general information and not legal advice. Consult professional counsel for help regarding specific situations.

Column first appeared in the Oregon Daily Journal of Commerce on March 15, 2024.