To Bond or Not to Bond

Most public agencies have requirements to obtain payment and performance bonds on public works construction projects.

Why Are Bonds a Good Idea:  A payment and performance bond serves as a form of insurance or protection for the public agency, taxpayers, and others to protect against two types of events: 

1. The contractor doesn't pay subcontractors, suppliers, or workers 
2. The contractor fails to perform the work

Especially in this troubled economy where many contractors are on shaky financial footing, it's a good idea for public agencies to have protection beyond the assets of the contractor alone.  That's why most states have laws requiring payment and performance bonds.

Ohio's Gamble: Ohio State University (OSU) recently awarding a $1 billion Construction Manager at Risk hospital project without a requirement for the contractor to submit a  payment and performance bond.  

• OSU's Position:  OSU argued that the bond was not required since the law requiring bonds applied only to "bidders," and Turner Construction Company was not a bidder, but was selected as the Construction Manager based on a qualifications based process. 

• The Challenge to OSU:  The American Subcontractors Association (ASA) and the Surety and Fidelity Association of America (SFAA) disagreed and took OSU to court.  ASA and SFAA argued that projects came under the Construction Demonstration Reform Projects authorized by the Ohio Legislature (HB 318) that requires that 

"in developing their Construction Demonstration Reform Projects, the state institutions of higher education are not exempt from the applicable provisions of law concerning...bonding..."  

• The Court's Decision:  The Supreme Court of Ohio dismissed the lawsuit on June 21, 2011, noting that ASA and SFAA lacked standing to file the case.  With $1 billion at stake let's hope there are not performance or payment problems on the project.

More Information:  For additional details about the OSU case, see the following links:

• A Bond Loophole? by Keane E. Aures, Robinson & Cole, LLP, Attorneys at Law
• American Subcontractors Association

Evaluate the Risk:   Even in those limited cases where laws permit a public agency to waive or reduce bonding requirements, public agencies should evaluate the potential risk to the project.  

• Example:  In Washington State, a public agency using a Small Works Roster process with a project costing less than $35,000 may waive the bonding requirements, provided that the agency agrees to pick up the liability in the event of claims.  

Mike Purdy's Public Contracting Blog 

© 2011 by Michael E. Purdy Associates, LLC 

http://PublicContracting.blogspot.com