If you do not follow the Oregon legislature closely, you may have missed a new law, which went into effect January 1, 2020, that impacts the treatment of retainage on private and public construction projects over $500,000.
For private and public construction contracts entered into on or after January 1, 2020 that include a contract price of more than $500,000, ORS 279C.570(2) and ORS 701.420(2)(b) require an owner, contractor or subcontractor to place the amounts deducted as retainage into an interest-bearing escrow account. The interest on the retainage accrues from the date the payment request is made until the date the retainage is paid to the contractor or subcontractor to which it is due.
Although this law seems simple on the surface, the application of this new law raises many questions. We have attempted to answer some of those questions below.
Who Provides Escrow Services and What Are the Fees?
Generally, an interest-bearing escrow account is not an account that can be opened up at your local bank or a title company as it is unrelated to a mortgage or the sale of the underlying land. Rather, these accounts are opened with escrow companies that provide this specialty service. In Oregon, there are only a handful of companies that provide this escrow service.
The fees associated with opening an escrow account vary depending on the amount of money deposited into the account, how long the money will sit in the account, and how disbursement will occur.
Because only a couple of companies provide this escrow service and the fees are on a sliding scale basis, it is imperative to do your due diligence before the project starts and understand the logistical and financial impacts this will have on your project and your bottom line.
What Happens if the Retainage Is Not Placed into an Interest-Bearing Escrow Account?
ORS 279C.570(2) and ORS 701.420(2)(b) provide clear language as to when the retainage has to be placed into the escrow account and how the interest will accrue. However, the statutory language does not provide any clear explanation of what will happen if the retainage is not placed into an escrow account. Specifically, it does not identify what the offending party is going to be liable for: the amount of interest that was supposed to accrue if the money was in the escrow account or the statutory amount of 12% per year (or 1% per month).
Based on the statutory language and the legislative history, it seems that the offending party would be liable for the interest that should have accrued if the money was in the escrow account. This interpretation is in line with the language in ORS 279C.570 and ORS 701.420 as the statutory amount of 12% (or 1% per month) is only activated if the contractor or subcontractor has completed its work and the owner accepted the work, but the final payment has not been paid to the contractor.
Who Gets the Interest?
Although not specifically stated in the language of ORS 279C.570 and ORS 701.420, the interest accrued on the project probably accrues and is due to the contractor or subcontractor and not to the party that opened the account.
This conclusion is supported by the legislative history related to these laws (for example, prior laws in the Public Contracting Code provided that “earnings” from an interest-bearing account accrue to the contractor) and the rationale behind the concept of retention because retention is tied to specific work completed on the project.
If you have additional questions or would like additional information about this topic, please contact us.