Introduction
On July 23, 2023, a new Washington law relating to retainage for private construction projects comes into effect. It will apply to private commercial and residential construction, but will not apply to single-family residential projects with less than 12 units. In sum, this new law caps the amount of retainage at 5% of the contract price and will require the entity holding retention to pay interest at 1% per month on final payment starting 30 days after completion/acceptance of work. Additionally, this new law allows a downstream contractor/subcontractor the ability to provide a bond for release of retainage, if certain requirements are met.
Background
In April 2023, the Washington Senate and House passed the subject bill – Washington Bill 5528. In May 2023, the bill was signed into law by Governor Inslee and goes into effect on July 23, 2023. Washington Bill 5528 will become a new chapter in Title 60 RCW.
Application
A critical question is whether this new law will apply retroactively (to past or existing contracts) or prospectively (to contracts executed on or after July 23rd). Unfortunately, there is no clear answer because the new law does not contain language or direction on its application. Based upon a number of factors, there is a presumption the bill will only apply prospectively. Ultimately, the issue may need to be decided by the courts.
Retainage Limit – 5%
Under Washington Bill 5528, an owner/contractor/subcontractor “may withhold as retainage an amount equal to not more than five (5) percent of the contract price of the work completed for private construction projects.” See Section 1. This 5% cap is similar to certain public works retainage requirements.
Notice of Completion and Interest Accrual
The new law provides notice of completion timelines as well as commencement of interest on final payment after notice is provided. Specifically, when the general contractor or subcontractor considers its work to be complete it shall notify the owner (if a general contractor) or the upstream contractor (if a subcontractor). Note – the form of “notice” is not defined by the new law. Within 15 days of receiving notice of completion, the owner or upstream contractor will need to either: (1) accept the work, or (2) notify the downstream entity of incomplete work. So, if the owner or upstream contractor provides notice of incomplete work within 15 days, interest can be avoided. Important to note – if the owner or upstream contractor does not accept the work and/or does not notify the downstream entity of incomplete work, then 1% interest on the retainage shall commence 30 days following the 15 day response period, i.e. 45 days from receipt of notice of completion.
A contractor in receipt of a downstream (subcontractor) notice of completion may provide said notice upstream, to the owner or upper-tier contractor. Similarly, if the owner or upper-tier contractor (upon receipt of the downstream notice of completion) does not accept the work or does not notify the contractor of incomplete work within 15 days of receipt, then interest commences 30 days after the end of the 15 day period. The new law does have some ambiguities regarding response times to notice and interest accrual when a downstream notice of completion is forwarded on to the owner.
Regardless, remember to pass it on. A contractor who receives notice of completion from a subcontractor will not have an obligation to pay interest if the contractor timely notifies the owner or upper-tier contractor. For example, if a contractor receives a notice of completion from its subcontractor, then the contractor should provide (pass on) the notice of completion to the owner or upper-tier contractor. If the contractor passes on the notice within 30 days of receipt, then the contractor’s obligation to pay interest on final payment does not begin until payment of the subcontractor’s retainage is received from the owner or upper-tier contractor.
Retainage Bond
Under this new law, contractors and subcontractors on private construction projects may post a retainage bond in lieu of retention. If the bond meets certain requirements, the bond must be accepted by the owner or upstream contractor.
Caution
The new law was the subject of negotiation and compromise by a number of interested groups. As is common when this process occurs, there is some ambiguity in the statutory language.
If you have further questions, please feel free to contact James Grossman at jgrossman@ashbaughbeal.com. James will be discussing SB 5528 in more detail at Ashbaugh Beal’s 24th Annual Construction Law Forum on Thursday, October 26, 2023.