Retainage on Private Construction Contracts: New Rules In Washington State

On July 23, 2023, new rules for how retainage is handled on private construction projects went into effect in Washington state. The new legislation now provides some safeguards to contractors and subcontractors on private projects, with some limited exceptions.

The new rules limit how much retainage may be withheld, provide a deadline by which retainage is to be disbursed, and for interest to be paid if that is delayed past a certain point. The goal is to help reduce unjustified and lengthy delays in paying contractors and subcontractors when a job is completed. It applies to all private construction projects except single-family residential projects of fewer than 12 units. The legislation was supported within the construction industry, and passed without opposition.

Retention is now capped at 5% of the contract price on private construction projects. The owner, contractor, or subcontractor must pay interest at the rate of 1 percent per month on the final amount overdue to the contractor or subcontractor. The interest begins accruing 30 days after the contractor or subcontractor has completed, and the owner has accepted, the work under the contract. Interest accrues until final payment is tendered.

To start the clock running, the contractor or subcontractor must provide notification of completion of their work to the party who hired them. The party receiving that notice then has 15 days in which to either accept the work, or to notify the contractor or subcontractor of work that remains to be performed.

If within those 15 days, the party does not accept the work or does not notify the contractor or subcontractor of work yet to be performed, the interest begins accruing 30 days after the end of the 15-day period. With these timelimes, it is recommended that all parties calendar the relevant due dates, and have an effective “tickler” system with reminders.

A contractor’s obligation to pay interest to a subcontractor will not begin until the contractor has received payment for the subcontractor’s retainage, so long as the contractor has submitted the subcontractor’s retainage request to the owner or upper-tier contractor within 30 days after receipt from the subcontractor. This appears to address the reality of “pay-when-paid provisions”, so that contractors don’t get stuck between a subcontractor’s retainage request and a slow-paying customer.

In lieu of retainage, a contractor or subcontractor may tender a retainage bond not to exceed 5 percent of the moneys earned by the contractor.

The new rules will not eliminate disputes about work, but should help speed up final payment when projects are completed.

These rules were passed in Engrossed Substitute Senate Bill SB 5528, and will be codified as a new chapter in RCW Title 60.