CONTRACTS ‑- PUBLIC WORKS ‑- RETAINED PERCENTAGE OF MONEYS ‑- BID SPECIFICATIONS

CONTRACTS ‑- PUBLIC WORKS ‑- RETAINED PERCENTAGE OF MONEYS ‑- BID SPECIFICATIONS

(1) A public body to which RCW 60.28.010 applies, in calling for bids for a public works contract, may not require in its bid specifications or otherwise that all prospective bidders indicate in their bid proposals whether or not they will elect to have the retained percentage of moneys earned on the contract placed in escrow for investment as provided for in § 1, chapter 38, Laws of 1970, instead of leaving it with the public body.

(2) A public body to which RCW 60.28.010 applies, in determining the lowest and best bidder for a public works contract, may not, in awarding the contract, take into account a statement of intent by a particular bidder as to whether or not, if awarded the contract, he will elect to leave his "retained percentage" with the public body pending completion of his performance under the contract.

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                                                                 January 13, 1971

Honorable Robert V. Graham
State Auditor
Legislative Building
Olympia, Washington 98501

                                                                                                                   Cite as:  AGO 1971 No. 2

Dear Sir:

            This is written in response to your recent request for an opinion of this office on two questions relating to the uses to be made by a contractor of the retained percentage of moneys earned on a public works contract under RCW 60.28.010, as amended by § 1, chapter 38, Laws of 1970.  We paraphrase your questions as follows:

            (1) May the state or any other "public body" to which RCW 60.28.010 applies, in calling for bids for a public works contract, require in its bid specifications or otherwise, that all prospective bidders indicate in their bid proposals whether or not they will elect to have the retained percentage of moneys earned on the contract placed in escrow for investment  [[Orig. Op. Page 2]] as provided for in § 1, chapter 38, Laws of 1970, or instead leave it with the public body?

            (2) May the state or other "public body" to which RCW 60.28.010 applies, in determining the lowest and best bidder, take into account a statement of intent by a particular bidder as to whether or not, if awarded the contract, he will elect to leave his "retained percentage" with the public body pending completion of his performance under the contract?

            We answer both of your questions in the negative for the reasons set forth in our analysis.

                                                                     ANALYSIS

            In AGO 1970 No. 21 [[to Department of Highways on October 5, 1970]], copy enclosed, we described the significance and effect of § 1, chapter 38, Laws of 1970 (amending RCW 60.28.010), as follows:

            "Prior to May 14, 1970 [the effective date of chapter 38, Laws of 1970], RCW 60.28.010 required that every contract by a public body for public improvement or work provide for the retention of a certain percentage of the moneys earned by the contractor.  This statute also created a lien in favor of mechanics, subcontractors, materialmen, and others against this retained amount.  However, that lien was not enforceable unless the claim was filed within thirty days following the final acceptance of the contract in accordance with the provisions of RCW 39.08.030 through RCW 39.08.060.

            "Notably, this version of RCW 60.28.010 provided only that the money be retained by the public body.  However, during the recent 1970 legislative session, the statute was amended by chapter 38, Laws of 1970.  The essence of this amendment was to provide that the contractor should have an option to invest the amounts which are retained.

            "Chapter 38 became effective on May 14, 1970.  The critical amendment was contained in § 1 of the act, and added the following subsection to RCW 60.28.010:

            "'(2) The moneys reserved under the provisions of subsection (1) of this section, at the option of the contractor, shall be:

             [[Orig. Op. Page 3]]

            "'(a) Retained in a fund by the public body until thirty days following the final acceptance of said improvement or work as completed; or

            "'(b) Placed in escrow with a bank or trust company by the public body until thirty days following the final acceptance of said improvement or work as completed.

            "'When the moneys reserved are to be placed in escrow, the public body shall issue a check representing the sum of the moneys reserved payable to the bank or trust company and the contractor jointly.  Such check shall be converted into bonds and securities chosen by the contractor and approved by the public body and such bonds and securities shall be held in escrow.  Interest on such bonds and securities shall be paid to the contractor as the said interest accrues.'

            "As may be seen from the above, the contractor now has an option which he alone may exercise.  The moneys that have been retained may be placed in escrow with a bank or trust company and may be invested in bonds and securities chosen by the contractor and approved by the public body.  The contractor is entitled to the interest as it accrues.  The moneys must be invested in such a way that the escrow can convert the securities into money thirty days following final acceptance of the work.  If the contractor does not choose to exercise the option, the public body retains the moneys as it has done in the past."

            We then concluded in this earlier opinion that the option provided for in this 1970 amendatory act is not applicable to public works contracts which were executed prior to its effective date.  With this in mind, we now turn to the two questions raised by your immediate request.

            Question (1):

            Assuming the execution of a contract to which the option provided for in subsection (2) of RCW 60.28.010 is applicable,  [[Orig. Op. Page 4]] you will note that this subsection contains no express statement concerning the timing of the contractor's election.  However, the wording of the subsection1/ does indicate that the election is to be made after the contract is awarded since it speaks in terms of thecontractor making the election.  It is fundamental that a bidder is not the contractor until he has been awarded the contract.

            Since the contractor cannot make a binding election prior to being awarded the contract, there could be little reason for requiring him to indicate in his bid which option he will take if he is awarded the contract.  The most logical possible reason the public body would have for requiring such an indication of intent would be to use that indication as a factor in determining which bidder will be awarded the contract.  However, for the reasons stated below, the public body cannot properly use the contractor's election as a factor in awarding a contract; therefore, the public body cannot require the contractor in his bid proposal to indicate which option he will choose.  At the very least, as we will discuss in answer to your second question, such a requirement would tend to defeat the purpose of the legislature in granting the option.  For these reasons we cannot attribute to the legislature an intention to allow agencies to adopt that requirement.

            Question (2):

            To answer your second question, it is necessary to review the history of the law relating to retention of money from payments to contractors on public works jobs.  In 1921, the Washington legislature passed the first retained percentage law.  The reason for this law was stated inHall and Olswang v. Aetna Casualty Co., 161 Wash. 38, 47, 296 Pac. 162 (1931), wherein the court said:

            "The almost universally accepted rule is that general mechanics' and materialmen's lien statutes, in the absence of express words therein, subjecting public property to such liens, do not subject public property to such liens. . . ."

             [[Orig. Op. Page 5]]

            And, at page 48,

            ". . . the only statutory rights of labor and material claimants to the contractor's earnings under the contract, are against the statutory fifteen per cent retention of such earnings."

            The above case points out that the purpose of the retained percentage statute was, and is, to give laborers and materialmen rights in a certain percentage of the contractor's earnings.  These rights did not exist prior to the passage of the 1921 statute.

            Until passage of chapter 38, Laws of 1970, the contractor could receive no benefits from the retained moneys.  Thus, the contractor could not use his money until it was released by the public body thirty days after acceptance of the contract, nor did he receive any other remuneration for having his money tied up for the length of the contract.

            Recognition by the legislature of this fact is evidenced by the amendments to the original 1921 act (chapter 166, § 1, Laws of 1921).  The original act provided for the retention of fifteen percent of each progress payment.  In 1963, the legislature reduced the amount of retention to ten percent of each progress payment and also gave the public body the power to waive the retention at any time after fifty percent of the original contract was completed (§ 1, chapter 238, Laws of 1963).  In 1969, the legislature reduced the retention to ten percent of the first $100,000 and five percent for all amounts over $100,000; and allowed the public body to accept a contract in which there would be an unreasonable delay in completing the contracted work, pay the retained percentage out thirty days after this acceptance, and then enter into a contract with the same contractor for the completion of the original contract work.  (Section 1, chapter 151, Laws of 1969, Ex. Sess.)

            The above amendments all had the same effect; i.e., they reduced the percentage to be retained by the public body for the retained percentage fund.  Then, in 1970, the legislature passed the act in question, giving the contractor the option to leave the money with the public body or to have the public body deposit it in an escrow account where it would be invested and the earnings paid to the contractor as they accrue  [[Orig. Op. Page 6]] (§ 1, chapter 38, Laws of 1970).  Apparently, the legislature, while still recognizing the hardship to laborers and mechanics which would exist in the absence of the retained percentage law, has also recognized the fact that the contractor loses the use of his retained money, and even of its temporary earning power.

            In order to interpret chapter 38, Laws of 1970, in the light of your question, it is necessary to look at the relevant rules of statutory construction.  The primary rule in construing statutes is to ascertain and give effect to the legislative intention.  King County Employees' Ass'n. v. State Retirement Board, 54 Wn.2d 1, 336 P.2d 387 (1959);Layton v. Home Indemnity Co., 9 Wn.2d 25, 113 P.2d 538 (1941); andMcKenzie v. Mukilteo Water District, 4 Wn.2d 103, 102 P.2d 251 (1940).  This rule was perhaps best stated in the ancient case of Eyston v. Studd (England, 1574), 2 Plowden 460, 464 [cited with approval inAlderwood Water Dist. v. Pope & Talbot, Inc., 62 Wn.2d 319, 321, 382 P.2d 639 (1963)]:

            "'. . . intent of statutes is more to be regarded and pursued than the precise letter of them, for oftentimes things, which are within the words of statutes, are out of the purview of them, which purview extends no further than the intent of the makers of the act, and the best way to construe an act of Parliament is according to the intent rather than according to the words. . . .'"

            As a guide in determining the legislative intent of an amendment to a statute, the old law must be considered, ". . . for a presumption carries in all changes in statute law that the legislature had in mind a mischief . . . and a remedy."  In re Eichler's Estate, 102 Wash. 497, 499, 173 Pac. 435 (1918).  Another helpful rule is that ". . . no construction should be given to a statute which leads to gross injustice or absurdity."  In re Horse Heaven Irrigation District, 11 Wn.2d 218, 226, 118 P.2d 972 (1941).

            Applying these rules of statutory interpretation to the facts, it seems clear that the mischief to be remedied by the 1970 amendment to RCW 60.28.010 was the fact that contractors were not able to use the money retained by the public body.  The general tendency of the amendments to the original 1921 retained percentage act has been to free more of the contractor's  [[Orig. Op. Page 7]] moneys by gradually reducing the percentage to be retained.  In 1970, in furtherance of this policy, the legislature gave the contractor the option to put his money to work and receive the interest as it accrued.

            Since the purpose of the 1970 amendment was to allow the contractors to earn money on the amount held in the retained percentage fund, it would be an absurd construction then to hold that the public body may discourage the exercise of this option by using it as a factor in determining the low bidder.  One reason for making the escrow option a factor in determining low bidder would be the savings to the public body resulting from the ability to use the money held in the retained percentage fund.  The value of this savings could then be subtracted from the bids of those bidders who exercise their option to have their funds retained by the public body rather than having them put into an escrow account.  However, such a practice would in effect defeat the purpose of the amendment since the contractors would be under pressure to leave their moneys with the public body for fear of losing a contract on which they would otherwise be the lowest and best bidder.  Furthermore, the above theory discounts the possibility that the added income to the contractor resulting from the investment of the retained percentage will be reflected in a lower bid than the contractor could have made otherwise.

            For the above reasons, the answer to your second question is that the state or other public body, in determining the lowest and best bidder, may not take into account the statement of intent of a particular bidder as to whether or not he will elect to leave the retained percentage in the custody of the public body pending completion of the contract.

            We trust the foregoing will be of assistance to you.