Early this year, Oregon bill HB 2415 went into effect, changing some of the retainage requirements under Oregon’s prompt payment laws. Oregon law now requires the hiring party to hold retainage in an interest-bearing escrow account on any construction contract over $500,000. Although it’s a relatively minor change, anyone working on either private or public construction contracts in Oregon should be aware of these new retainage requirements.
Oregon’s retainage laws
Retainage is a portion of the total construction contract price withheld until the project has reached substantial completion and the contractor has satisfactorily performed under the contract terms. Oregon’s retainage provisions can be found under Or. Rev. Stat. §701.420 et. seq. (for private projects) and various provisions under Or. Rev. Stat. §279C (for public projects).
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Generally speaking, for either type of project, the amount of retainage is limited to 5% of the total contract price. Any withheld retainage should be released with final payments. If retainage is improperly withheld, interest penalties will begin to accrue.
For private construction projects, a 1% per month interest will accrue 30 days after the completion and acceptance of the contract work.
On public works projects, a 1.5% per month interest penalty (current rate) will kick in either 30 days after receipt of the final payment invoice, or 15 days after the payment is approved by the contracting agency; whichever is earlier.
Changes under the new bill
The bill in question is HB 2415, which was enacted by the Oregon legislature in July 2019 and went into effect on January 1, 2020. This means that the new requirements only apply to construction contracts entered into on or after the effective date.
Retainage must be held in escrow on contracts over $500,000
The above-mentioned rules and regulations still apply, yet with one key difference. Both the private and public statutes had additional language added to them.
If the contract exceeds $500,000, the [contracting agency/ owner/ contractor/ subcontractor] shall place amounts withheld as retainage into an interest-bearing escrow account. Interest on the retainage amount accrues from the date the payment request is approved until the date the retainage is paid to the [contractor/ subcontractor] to which it is due.
Basically, on any private or public contract over $500K, the party withholding retainage must place the withheld amounts in an interest-bearing escrow account from now on. The interest will begin to accrue once the payment request is approved. Once retainage is due, the hiring party must return the retainage along with the accrued interest.
Takeaway for Oregon contractors
The state of Oregon now joins just a handful of states that require retainage amounts to be kept in a separate, interest-bearing escrow account. By enacting this requirement, the state legislature is looking to provide extra protection for construction payments.
Retainage in the construction industry can be easily abused. Requiring the deposit of those funds in an escrow account limits the possibility of diversion or misuse. In addition to the added security, parties waiting for retainage will benefit from automatic interest accrual. Under the previous statutes, interest penalties are provided for, but only when the retainage amounts are improperly withheld. Now, for these larger contracts, interest will accrue even if the funds are being “properly withheld.”