New Oregon Law Complicates Retainage on Construction Projects

Antonija Krizanac | Ahead of Schedule

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.

Managing Construction Risk For Oregon Owners And Builders

Joseph Voboril | Tonkon Torp

The Construction Contract is Critical

A construction contract is the primary source for managing risk for a project of any size. The contract should include detailed provisions that touch on every element of a project including warranties, limitations of liability, insurance, payment terms, change order requirements, dispute resolution, and lien releases, as well as schedule delays. The American Institute of Architects provides form contracts frequently used for commercial projects across the country. However, it’s very common for an experienced owner or contractor to modify the forms to tip the contract conditions in their favor.

Construction contracts assign responsibility for all design and build elements, and clarify where roles start and stop. In the most traditional model, an owner executes separate contracts for design of the project with an architect and construction of the project with a general contractor, keeping the design and construction roles legally separate.

For projects in which the owner is more vested in the ultimate function of the completed project, rather than its appearance, or is looking to minimize the number of vendors to manage, a design-build contract places the design and the construction of the project in the hands of the general contractor. The design-build trend is on the rise across the country and, in Oregon, design-build is permitted by all agencies for all types of design and construction.

Management of Schedule – Related Risk

There is an old saying in the construction industry. It goes as follows:  “On any project, there are three things that the owner cares about: cost, quality, and time; the owner gets to pick two out of the three.”

Unfortunately, there is a lot of truth in this saying. If the owner is willing to spend more money or give the general contractor more time, the quality desired by the owner is easier to achieve. If the owner wants to accelerate the completion date, it will likely cost more or the quality may suffer. These objectives are addressed in various provisions in a well-drafted construction contract, primarily by provisions that deal with change orders.

Maintaining the schedule is often the most challenging of the three objectives.

Missed deadlines are caused by a maddeningly large number of issues, from natural forces and poor planning to market forces and supply chain interruptions. All construction projects are scoped with an agreed upon end date. But for projects that have a more critical completion date, the Tokyo Olympic Stadium for example, there are ways to mitigate schedule-related risk. The primary tool for an owner is to include a liquidated damages provision in the contract. This provision specifies a dollar amount that the contractor will pay the owner for every day that the project extends past the contracted completion date. The amount may also increase the longer a project is delayed. On the flip side, contractors often counter with provisions that require the owner to pay for owner-caused delays, and for payment of an early completion bonus if the contractor completes the project prior to the contracted completion date.

Other Risk Mitigation for Owners and Builders

Retainage and bonds are two additional mechanisms available to owners to reduce risk related to contractor’s performance.

Retainage is a contract provision that specifies a percentage of the contract price that can be withheld from progress payments until the work is substantially complete. Under Oregon law, an owner is not allowed to retain more than 5% from progress payments for work completed on both public and private projects.

Performance and payment bonds are required on public projects in Oregon. Since bonds serve as protection for the owner, the premiums are generally charged to the cost of the work and paid by the owner. Typically, performance and payment bonds are not required on private projects that have an experienced and well-capitalized general contractor. When that’s not the case, the owner will often take on the premium cost and require both a performance bond and payment bond.

Builders are not without legal protections in Oregon. In the event of non-payment by an owner, access to liens and bonds is available in different form for public and private projects.

The good news for private projects is that since Oregon is a direct lien state, any claimant who is a contractor, subcontractor, designer, or supplier has the direct right to file a lien claim even if the general contractor or a higher-tier subcontractor has been paid. To file, they must comply with the statutory notice and filing provisions which we detail in our Real Estate Guide.

Contractors, designers, and material suppliers do not have the right to lien public property in Oregon, but they do have the right to make a claim against the statutorily required payment bond.

Construction in Oregon is enjoying healthy growth and will do so for the foreseeable future. Significant commercial and housing projects are making headlines every week. Owners and builders are embracing exciting new collaborative models and sustainable building practices. Opportunity Zones are energizing development, construction jobs numbers are breaking records, and industry leaders are eager to come to Oregon to stake out their brick and mortar presence.

Oregon Court of Appeals Clarifies Timing Rule for Construction Liens

Blake Robinson | Davis Wright Tremaine | August 8, 2019

Under Oregon law, a contractor or subcontractor must file a construction lien within 75 days “after the person has ceased to provide labor, rent equipment or furnish materials or 75 days after completion of construction, whichever is earlier.” ORS 87.035(1). But when does the 75-day period run when a subcontractor fully completes its work on a project, but is called back months later for additional work?

In a recent case, Bethlehem Construction, Inc. v Portland General Electric Company, the Oregon Court of Appeals determined that the 75-day period ran from completion of the additional work. 298 Or App 348, — P3d —- (2019). The court primarily based its conclusion on the fact that the subcontractor performed the additional work under a change order that specifically referenced the original contract.

Accordingly, contractors and subcontractors who are called back to a job to perform additional work and who have not already filed a construction lien should request a change order referring back to the original contract. Likewise, owners should recognize that even if a contractor or subcontractor fails to file a construction lien within 75 days of completion of the original work, the contractor or subcontractor’s lien rights can be revived if the contractor or subcontractor is called back to perform additional work under a change order that refers back to the original contract.

In Bethlehem Construction, PGE hired a general contractor, Abeinsa, for the construction of a power plant. Abeinsa, in turn, subcontracted with Bethlehem Construction. Under the subcontract, Bethlehem agreed to manufacture concrete panels for Abeinsa.

Bethlehem completed its work and issued a final invoice, but did not file a lien within the ensuing 75 days. Around eight months later, Abeinsa requested that Bethlehem return to the project to evaluate damage to the panels caused by a different subcontractor.

Bethlehem and Abeinsa signed a “Change Order Request” listing the original contract number and name in the “reference” field and describing a “scope of change” to the original contract. Bethlehem completed the work and, within 75 days of doing so, recorded a lien covering both the original and change order work.

The Oregon Court of Appeals concluded that Bethlehem’s lien was timely because all of the evidence (specifically, the language in the Change Order Request referring to the original contract) demonstrated that the parties intended the original and subsequent work to be “two parts of one single contract.”

The court also concluded that the later work was not “trivial or trifling”—which was significant because the 75-day deadline to record a lien is not extended by the contractor or subcontractor returning to the project to perform “some trifling work or a few odds and ends after apparently completing the job and removing its equipment.” Here, the later work was not trivial or trifling because the Change Order Request specifically required the work, and the work was “significant to the project.”

  1. A construction lien must be recorded within the earlier of 75 days of the contractor or subcontractor stopping its work on the project or completion of construction.
  2. If a contractor or subcontractor completes its work on a project but later is called back to do additional, related work, and it performs that work under a change order that specifically refers back to the original contract, the 75-day period will likely run from the date the later work is completed.
  3. If the later work is not required by the original contract or a change order, or is not significant to the project, the 75-day period will likely run from the date the original work was completed.

New Oregon Gross Receipts Tax Presents Special Challenges for Construction Projects Located in Oregon

Lewis Horowitz and Eric Kodesch | Lane Powell | June 10, 2019

Oregon has enacted a new gross receipts tax (the “Oregon CAT”), largely based on the Ohio commercial activity tax (“Ohio CAT”), but with significant differences.  We issued a legal update with a detailed summary of the Oregon CAT and its effect on businesses with Oregon-sourced receipts — for the construction industry that includes projects located in Oregon.  Generally, the Oregon CAT imposes a 0.57% tax on “taxable commercial activity” in excess of $1 million, with a subtraction for 35% of the greater of (a) “cost inputs” or (b) “labor costs,” apportioned to Oregon.  Taxable commercial activity is generally defined as Oregon-source gross receipts.  The Oregon CAT goes into effect on January 1, 2020.

The Oregon CAT could prove especially burdensome for the construction industry, particularly for general contractors and design professionals, because a substantial portion of gross revenue received often is dedicated to the payment of subcontractors, suppliers and subconsultants (who each will again pay the Oregon CAT on their Oregon-source gross receipts).  Further, the statute does not provide transition relief for contracts entered into before the Oregon CAT could be factored into bids and contract prices.  

Potential Exclusion

The Oregon CAT excludes from gross receipts, “[p]roperty, money and other amounts received or acquired by an agent on behalf of another in excess of the agent’s commission, fee or other remuneration.”  The scope of this exclusion has not been defined for purposes of the Oregon CAT and the Oregon Department of Revenue (ODOR) may provide guidance about the exclusion. 

In Ohio, an identical exclusion may apply to amounts received by a general contractor or design professional and paid to a subcontractor, supplier or subconsultant, depending on the contractual relationships between the owner, contractor/design professional, and subcontractor/supplier/subconsultant.  Specifically, the Ohio Department of Revenue has issued administrative rules generally indicating that: 

  • A contractor’s gross receipts include amounts the contractor receives under a typical lump sum (including fixed price or GMP) contract in which the contractors bears the risks of the subcontractor/supplier costs.
  • A contractor’s gross receipts exclude amounts the contractor receives under a cost-plus contract, other than the amounts above cost (i.e., the plus factor).

The regulations interpreting and implementing the Ohio CAT do not apply in Oregon.  Nonetheless, it seems logical that the ODOR might consider the Ohio rules for guidance, at least initially.  Accordingly, the Ohio lump sum contact versus cost-plus contract distinction could serve as a foundation for Oregon regulations when developed.  ODOR will need to address these and other questions, such as whether a lump sum contract could make the contractor the owner’s agent with respect to the amount paid to subcontractors or suppliers. Of course it would be preferable to avoid this problem completely through a change in the law.   

The Oregon legislature is already considering ways to address some of the problems created by, and objections to, the Oregon CAT.  Late last week draft proposed amendments were submitted to HB 2164-1.  This bill will be the vehicle this session for “technical corrections”  Payments to subcontractors are addressed favorably in Section 1 of the proposed amendment, via a proposed revision to Section 58(1)(b) of the Act.  Specifically, proposed subsection (UU)(ii) on page 8 (italicized below) would amend the definition of “commercial activity” subject to the Oregon tax to exclude:

 “[(QQ)] (UU) Revenue received by a business entity that is mandated by contract or subcontract to be distributed to another person or entity if the revenue constitutes:

(i) [certain commissions paid to commission sales contractors such as split real estate commissions, etc., as described above]…; and

(ii) Subcontracting payments under a contract or subcontract entered into by a business entity to provide services, labor or materials in connection with the actual or proposed design, construction, remodeling, remediation or repair of improvements on real property or the location of the boundaries of real property.”

Sections 7-10 would be of particular interest if any of your contracts qualify. 

The Joint Committee on Tax Expenditures is scheduled to meet on June 14, 2019 at 8:30 a.m. to consider the proposed amendment.  You should discuss this opportunity with your government-relations team, lawyers or lobbyists to ensure that any concerns you have with the Oregon CAT are timely addressed with legislative leadership, or at least to express support for the proposed language quoted above.  The technical corrections bill is likely to move very quickly.

In the meantime, anyone involved in the construction industry should review their existing contracts to determine who may be obligated to pay for cost increases as a result of this new tax. 

How To File A Complaint With The Oregon Division of Financial Regulation About Your Delaying, Denying and Bad Treating Insurance Company

Daniel Veroff | Property Insurance Coverage Law Blog | May 10, 2019

When Oreganians are mistreated by their insurance companies, they can turn to the state government for help. Oregon’s Division of Financial Regulation has the authority to accept and investigate complaints by consumers.

Filing a consumer complaint can be done on the Division’s website and is an easy process. The website includes a fillable form that asks some basic questions about the insurance at issue. It then asks for a description of the issues, and for the insured’s thoughts on what would constitute a fair resolution.

According to the Division, most complaints are resolved within 60 days. The Division states:

Once we receive a complaint, an advocate will:

• Let you know in writing that we received your complaint

• Send a copy of your complaint to the insurance company, agent, or both

• Obtain a detailed response from the company, agent, or both

• Analyze the response and any supporting documents (the company or agent must respond within three weeks)

• Determine whether more information is needed or there is a possible violation

• Advise you of our findings.

The Division’s website also cautions as to what it can and cannot do in response to a compliant:

Oregon also offers a neat tool on its website for searching to find complaint comparable to yours.1 If you find that your insurance company is treating many customers the same way, you may be able to use that as leverage against your insurance company or with the Division to get extra help. The website also has other information about past complaints that can be helpful, including annual summaries.2

To contact the Division, you can go onto their website, the links in the footnotes, or contact as follows:

Phone: 888-877-4894 (toll-free)
Email: DFR.InsuranceHelp@oregon.gov

If you are not certain of your insurance claim rights or if you have questions about your policy benefits, please do not hesitate to call Merlin Law Group attorneys.
__________________________________
1 https://dfr.oregon.gov/help/complaints-licenses/Pages/complaint-compare-search-tool.aspx
2 https://dfr.oregon.gov/help/complaints-licenses/Pages/complaint-information.aspx