Sunday, August 7, 2011

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. 
"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:
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

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