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How do logistics of using securities in lieu of cash work for the state of Oregon?

OregonRetainage

In the state of Oregon, as of 1/1/20, any retainage is required to be held in interest bearing escrow accounts. There is also a section that states that certain alternatives may be used, so the contract can "give" them to the agency in lieu of cash, so then the originally retained cash gets paid out. Do you know how the actual logistics of this process works?

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Mar 3, 2020
Oregon's rules regarding the use of security in place of retainage can be daunting, but that may provide a helpful alternative to traditional retainage processes. Let's break them down piece by piece.

Using security instead of retainage in Oregon

Under the recent changes to Oregon's retainage laws, projects exceeding $500,000 will require that retainage be held in an interest-bearing escrow account. Further, as you mention above, the Oregon retainage statute also allows for the use of securities in place of withholding retainage. Under  § 279c.560 of Oregon's retainage statute, securities can be used in place of retainage on public projects in the state. That is, as long as the public entity doesn't feel like the use of security (rather than retainage) would pose an extraordinary risk. As for what kind of securities, exactly - that's laid out by § 279c.560(6) and (7).

Acceptable security under § 279c.560(6)

Under § 279c.560(6), the security must be "of a character approved by the Director of the Oregon Department of Administrative Services" This includes, but is not limited to, the following: (a) Bills, certificates, notes or bonds of the United States. (b) Other obligations of the United States or agencies of the United States. (c) Obligations of a corporation wholly owned by the federal government. (d) Indebtedness of the Federal National Mortgage Association. (e) General obligation bonds of the State of Oregon or a political subdivision of the State of Oregon. (f) Irrevocable letters of credit issued by an insured institution, as defined in ORS 706.008. Of the above options, letters of credit, cash, or other US notes would likely make be the easiest options for complying.

Acceptable security under § 279c.560(7)

This section seems much more practical. It calls for a surety bond which covers some or all of the retainage that would have been withheld. The bond must be in a form and amount approved by the contracting agency. And, if the bond doesn't cover the entirety of retainage on the job, then the agency will only be able to release a proportionate amount of retainage. Levelset has written about the use of retainage bonds before, so this article may provide a little bit more insight into their use: Retention Bonds – An Alternative to Waiting for Retainage.

Process for getting approval on retainage bonds

As for the logistical process of securing retainage bonds, submitting them for approval, and receiving retainage - the statute doesn't provide a ton of clarity as to how, exactly, that'd be undertaken. But, before securing a bond, it'd be wise to reach out to the contracting agency to ask if they have a process in place and if they'd consider the use of a retainage bond in place of traditional retainage then go from there. Additionally, or alternatively, it might be helpful to reach out to some surety bond providers to ask about the pricing and format for Oregon retainage bonds. That way, you'd be able to price out the cost of obtaining such a bond, plus they may already have the inside track on what will be required. Even if they don't, a surety may be willing to work with the contracting agency to come up with the right product in attempt to better provide retainage bonds going forward.
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