Controller's Division OUS Financial Administration Standard Operating Manual (FASOM)

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Section 13.05: Purchasing -- Retainage on Construction Contracts

The content of this policy is current, although it has not yet been transitioned to the new Fiscal Policy format.  This will be accomplished as time and resources permit.

A. General

Normally, 5% of each progress payment is retained until all work under a construction contract is complete and accepted. This retainage is paid after the institution Facilities has given the contractor written notice of acceptance. An amount to cover unfinished work (punch-list) is usually retained.

B. References

Oregon Administrative Rules, Chapter 580, Division 40, Retainage Processing Charges 007
ORS 279.420 and 279.435

Attorney General Opinion Letter, "Opinion Request OP-4215," 4/10/78

C. Standards

[1] Deductions from Retainage

If provided for in contract documents, deductions may be taken from the final payment as liquidated damages for the contractor's failure to meet the completion schedule. The institution must provide the contractor an itemized list, or punch-list, of all deductions. The liquidated damages are credited to the appropriate plant fund accounts in proportion to the original budget.

[2] Retainage from Progress Payments

In accordance with ORS 279, retainage from a progress payment may not exceed 5%. After 50% of the contract work is completed -- if work is progressing satisfactorily -- retainage on any progress payments may be eliminated with prior written approval of the contractor's surety.

[3] Substantial Completion of Work

A portion of the retainage may be released to the contractor upon substantial completion of the work and its written acceptance by the institution Facilities. The amount withheld may be no less than 100% of the estimated value of the work to be completed.

[4] Final Payment

Final payment is made to the contractor when all punch-list items have been completed satisfactorily.

D. Retainage Alternatives

Retainage is withheld as described in FASOM 13.05D[1] unless the contractor gives written notice to exercise an option described in FASOM 13.05D[2] and 13.05D[4]. The contractor may choose only one method of retainage.

No charge is assessed when OUS holds retainage. When a contractor chooses another alternative, OAR 580-40-007 provides for the following charges for retainage processing:

• $50 for initial record set-up
• $15 for each subsequent transaction regarding the retainage funds or securities.

These transactions include but are not limited to:

• depositing and withdrawing funds and reconciling the bank statement each month;
• receiving securities or safekeeping receipts for securities;
• preparing letters or statements to the institution, contractor or financial institution; and
• releasing funds or securities to the contractor.

These charges are deducted from the final payment to the contractor, deducted from the interest earned, or billed to the contractor.

[1] Retainage Held by OUS

Unless the contractor exercises Option 1 or Option 2 (below), the retainage is deducted from each progress payment and held in the building fund or other fund until final payment is made to the contractor. The standard procedures described in FASOM 13.05C[1] through 13.05C[4] should be followed.

[2] Option 1 - Securities Deposited in Lieu of Retainage

The contractor may deposit bonds or securities in lieu of retainage either with the Controller's Division or in an Oregon bank or trust company for the benefit of OSBHE. Interest accrues to the benefit of the contractor. The type of bonds or securities deposited in lieu of retainage must be approved by the Department of Administrative Services. Approved types include but are not limited to the following:

• Bills, certificates, notes or bonds of the United States
• Other obligations of the United States or its agencies
• Obligations of corporations wholly owned by the Federal government
• Indebtedness of the Federal National Mortgage Association
• General obligation bonds of the State of Oregon or any political subdivision thereof
• Certificates of deposit or savings account passbooks issued by a commercial bank, savings and loan association, or mutual savings bank duly authorized to do business in Oregon
• Corporate bonds rated "A" or better by a recognized rating service
• General obligation improvement warrants issued pursuant to ORS 287.502
• Irrevocable letters of credit from a bank doing banking business in Oregon mailed to the Controller's Division, PO Box 488, Corvallis, Oregon, 97339-0488.

  The following stipulations apply to irrevocable letters of credit:

  1. The account must be in the contractor's name.
  2. The amount must be in U.S. dollars.
  3. A description of the contract (project) and the institution's name must appear in the letter of credit.
  4. When the bank requires drafts to draw money, a draft and instructions must be attached to the letter of credit. Only drafts signed by either the Controller or designee should be honored. Partial draws must be allowed.
  5. The expiration date must be at least 30 days past the scheduled completion date or an extension will be required prior to the expiration date.

[3] Option 1 - Procedure

To comply with Department of Administrative Services regulations, expedite progress payment, and facilitate release of securities at the completion of the contract, the following procedures should be implemented:

1. The institution provides the contractor with a copy of the Department of Administrative Services regulations. The contractor is notified that under the general conditions of the contract the safekeeping receipt required by OAR 125-031-0000 will be made out in the name of OSBHE and mailed to the Controller's Division, PO Box 488, Corvallis, Oregon 97339-0488. The institution and project name must appear on all correspondence.
    
2. The institution notifies the Controller's Division of each contractor request to select Option 1.  Notification must include a copy of the award letter.
    
3. The Controller's Division notifies the institutional business officer whenever a contractor files safekeeping receipts covering retainage deposit securities. Such notification includes appropriate information on the contractor's name, retainage amount, etc.
    
4. The institution notifies the Controller's Division of each "Change Order" and "Payment Request" to the contractor for the contract.
    
5. When safekeeping receipts equal or exceed the required retainage, the progress payment is made. During approval of progress payments, the business officer ensures that deposits in lieu of retainage on file with the Controller's Division equal or exceed the 5% retainage under the contract.
    
6. If deposits are inadequate, payment is delayed until the Controller's Division notifies the institution that safekeeping receipts from the bank indicate sufficient additional funds are on deposit.
    
   However, if the contractor attaches the safekeeping receipt to the progress payment request, the business officer detaches the safekeeping receipt, sends it to the Controller's Division and waits for acknowledgement and acceptance of the deposit security before processing payment.
    
   Acknowledgement of the security deposit's acceptance is made to the institutional business officer. When a progress payment causes a decrease in the Board's interest in the securities on deposit with a bank or the Controller's Division, the Controller's Division must be notified in writing by the institution.
    
7. When work is substantially completed, the institution Facilities notifies the contractor of the project's acceptance. The institution must notify the Controller's Division in writing of any adjustment in the retainage amount at this time. The Controller's Division then advises the contractor and the bank that the OSBHE no longer has an interest in securities in safekeeping in excess of the adjusted retainage amount, which in most instances is 100% of the amount of uncompleted work, i.e., punch-list items. The Controller's Division must also be notified of any payment of punch-list work so that remaining securities can be released to the contractor. The final payment with a letter releasing the remaining securities must be sent to the Controller's Division to ensure that retainage processing charges are withheld from the final payment.
    
8. The Controller's Division then sends a letter to release all interest in the securities on hand or held in a financial institution.

[4] Option 2 - Retainage Deposited in a Financial Institution

The contractor may choose to have retainage deposited directly into an interest-bearing account at a financial institution (e.g., bank or savings and loan). Title to such funds remains with OSBHE until contract work is completed and accepted.

[5] OAR 125-031-0000

OAR 125-031-0000 must be followed in the creation, maintenance, and termination of such an account. The account should be opened jointly in the names of OSBHE and the contractor -- with the following stipulations:

• The account is established solely for the benefit of and under the control of OSBHE.
• The financial institution provides the Controller's Division with a receipt acknowledging the initial deposit. It also provides a description of the account, the provisions for interest accrual, the name of the contractor, and the full name under which the account is established.
• The financial institution agrees to provide the Controller's Division with statements, at least monthly, reflecting deposits, withdrawals, and interest credited to the account.
• Only designated representatives of OSBHE are empowered to withdraw, release, or transfer funds in the account, including interest.
• The designated OSBHE representatives are permitted to close the account without the contractor's concurrence. (Note: The contractor has no right to the retainage after default on the contract. Furthermore, funds are not available to a bankruptcy court if the contractor is found bankrupt (Attorney General Opinion 4215, April 10, 1978)).

[6] Interest on Deposited Retainage

Interest on deposited retainage accrues to the benefit of the contractor. The interest remains in the retainage account until the contract is satisfactorily completed, at which time the Controller's Division may release the entire amount to the contractor (Attorney General Opinion 4215, April 10, 1978). OUS charges may be deducted from the interest earned on the deposited retainage.  When the account is opened, arrangements are made for the financial institution to file the required Information Return (Form 1099) in the contractor's name for interest earned during the preceding calendar year.

[7] Accounts exceeding $100,000

If an account exceeds $100,000, the financial institution must pledge collateral equal to 25% of the excess deposit in accordance with statute.

[8] Option 2 Procedure

The accounting procedure for maintaining and eventually releasing retainage and accrued interest allows the contractor to continue billing normally without adjusting for retainage amounts already deposited. Normally, retainage funds are not withdrawn from an interest bearing account and released to the contractor. Care should be taken by the contractor and the institution to ensure that the amount of retainage is correct.

1. The institution notifies the Controller's Division of each contractor request to select Option 2.  Notification must include a copy of the award letter.
    
2. The Controller's Division requests approval from the State Treasurer to open a retainage account at the bank, and opens the account.
    
3. A retainage receivable account (A35xx) for each contract is established on the appropriate institution's books, fund 804901.
    
4. The Controller's Division notifies the institution when the retainage account at the bank and the receivable account at the institution are open.
    
5. The institution processes all retainage disbursements to the financial institution by debiting the appropriate A35xx account.
    
6. The institution notifies the Controller's Division of each "Change Order" or "Payment" to the contractor and "Payment" to the bank for this contract.
    
7. Periodically, the Controller's Division reconciles the receivable account with the deposit account at the financial institution.
    
8. When, as a project nears completion, a portion of the retainage is released as authorized by the institution, the contractor decreases the retainage shown on the application for payment. The institution processes the application as submitted but must notify the Controller's Division in writing of the retainage adjustment.

   Notification to reduce retainage must include the following:

   • Contractor's Name
   • Project Name and Number
   • Retainage bank account number
   • Amount of retainage to be returned to the institution
   • Amount of retainage remaining in the bank
   • Attach a copy of the "Application for Payment"
     
9. The Controller's Division withdraws the appropriate retainage amount from the financial institution and sends a check to the institution.
    
10. The Institution deposits the check and credits the retainage receivable account using the appropriate account code A35xx.
     
11. Upon the project's completion, the institution pays the remaining retainage to the contractor. To ensure that retainage processing charges are withheld from the final payment, a letter requesting withdrawal of remaining retainage from the interest-bearing account must be sent to the Controller's Division in advance of the final payment.  This request should include the information listed above.
     
12. The Controller's Division withdraws the remaining retainage from the interest-bearing account and sends a check to the institution.
     
13. The institution deposits the check and credits the retainage receivable account using account code A35xx, which should bring it to a zero balance.  The institution will then pay the final payment to the vendor.
     
14. The Controller's Division next sends a letter to the financial institution releasing the accrued interest to the contractor. A copy of this letter is sent to the contractor and the institution.

[9] Fiscal Year-End Accounting Procedure

Year-end accounting entries for retainage alternatives are as follows:

1. At year-end, the institution reports only cash retainage to the Controller's Division so that adjusting entries can be made. Amounts on deposit with financial institutions are available from the retainage receivable accounts. The Controller's Division holds safekeeping receipts for certificates of deposit.
    
2. The Controller's Division makes the closing entry by crediting a liability account and debiting a fund balance account for cash held by OSBHE and retainage deposited in financial institutions.
    
3. No year-end accounting entries are made when the contractor provides safekeeping receipts for certificates of deposit in lieu of retainage. The Controller's Division footnotes the Controller's Report by disclosing the value of the certificates of deposit and the amount of equivalent retainage they represent.

[10] Accounting Entries for Retainage Alternatives

The following examples illustrate the retainage alternatives procedures.

Facts:

• Amount of contract completed = $1,000
• Retainage on completed amount = $ 50
• Account Codes Used:
  • B0390, Retainage Payable
  • 40501, Buildings

Entries:

• Retainage Held In Cash By OSBHE:
  1. Record the contract payment of $950 using account code 40501.
  2. Record the Retainage Payable of $50, debiting account code 40501 and crediting account code B0390 within the construction fund.
  3. Record payment of released retainage using account code B0390 and appropriate construction fund.
• Retainage Deposited In An Interest-Bearing Account:
  1. Record the contract payment of $950 using account code 40501.
  2. Record the Retainage Payable by debiting account code 40501 and crediting account code B0390 of fund 804901.
  3. Record the deposit of retainage in the savings account at the bank by debiting account code A35xx, fund 804901.
  4. Record payment of released retainage using account code B0390, fund 804901.
• Safekeeping Receipts For Certificates of Deposit in Lieu of Retainage:
  1. Record the contract payment of $1,000 using account code 40501.
  2. No year-end accounting entries are necessary when the contractor provides safekeeping receipts (see FASOM 13.05D[9]).

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Note: This electronic document supersedes all previous versions and is subject to change.
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Last Updated: 06/13/03

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