5 New Public Works Bills Passed by Washington Legislature

As part of preparing for a two day class on Public Works Bidding and Contracting that I recently taught, I noted that the Washington State Legislature recently approved five public works related bills that do the following:

• Increase the dollar threshold for when a payment/performance bond may be waived
• Grant subcontractors additional rights to have retainage released early through a retainage bond
• Add an additional criterion to the list of mandatory bidder responsibility criteria
• Authorize Public Utility Districts to contract for on-call public works projects
• Authorize transit agencies (public transportation benefit area authorities) to use Job Order Contracting

Waiver of Payment/Performance Bond:  For public works projects of $35,000 or less, RCW 39.08.010 currently provides that "at the option of the contractor," a public agency "may, in lieu of the bond, retain fifty percent of the contract amount..."  In order to bring Washington law in compliance with federal small works bonding requirements, Senate Bill 5734, which passed both the House and Senate unanimously, addresses the following:

• Changes
• Project Amount:  Increases the $35,000 threshold to $150,000.  Unlike the payment/performance bond waiver provision applicable only for Limited Public Works Projects (Small Works Roster projects less than $35,000), this provision in RCW 39.08.010 does not require that the project less than $35,000 be bid through the Small Works Roster process.

• Retainage Amount:  Decreases the 50% retainage to 10% retainage in order to waive the payment/performance bond.

• Individual Sureties:  Allows a public agency to accept a payment/performance bond from an individual surety or sureties for projects of $150,000 or less, increased from $100,000.  All other sureties must be from an actual bonding company.

• Prevailing Wage Priority:  Reiterates the already existing requirement of RCW 60.28.040 (5) that unpaid prevailing wages and benefits are the first place priority in the event of multiple competing claims against the retainage.

• GC/CM:  Adds that this provision for withholding 10% retainage in lieu of obtaining a payment/performance bond on projects of $150,000 or less also applies to a General Contractor/Construction Manager (GC/CM).  This is a curious provision as all GC/CM projects are more than $150,000 and are multi-million dollar projects.  This addition doesn't appear to accomplish anything.

• Comments
• Agency Discretion?  Is a public agency required to accept the 10% retainage in lieu of obtaining the payment/performance bond?  The language of the law (both current and new) suggests that it is up to the contractor to make the request, and that the public agency "may" retain the 10% retainage in lieu of a bond.  It appears to provide the public agency with discretion whether to accept the request.  Consult with your attorney regarding how to interpret this issue.

• Time Period for Releasing Retainage:  Senate Bill 5734 fails to correct an error in RCW 39.08.010 that states that the retainage is held for 30 days "after the date of final acceptance."  Because a subcontractor, supplier, or worker can file a claim against the retainage up to 45 days following final acceptance, an agency that releases the retainage before 45 days following final acceptance is at risk for paying court ordered claims filed between day 31 and 45 following final acceptance.  If an agency intends to use this waiver of the bond/increase of retainage provision, I recommend not releasing the retainage until a minimum of 45 days following final acceptance.  

• No State Releases for Projects Less than $35,000:  Public agencies should recognize that for projects of $35,000 or less, the three state agencies (Revenue, Employment Security, and Labor and Industries) will not issue a release even though RCW 39.08.010 suggests they will.  See RCW 60.28.

Subcontractors and Retainage Bonds:  Current law (RCW 60.28.011 (6)) allows a contractor to submit a retainage bond to a public agency in lieu of retainage being withheld.  It also provides that if a contractor has submitted such a bond to a public agency, the contractor must, upon request of a subcontractor, accept a retainage bond from them in lieu of withholding retainage.  House Bill 1538 gives subcontractors additional rights to force a contractor to submit a retainage bond to a public agency:

• Changes
• Subcontractor Request:  A subcontractor may request the contractor to submit a retainage bond to the public agency for the portion of the subcontractor's retainage.  Currently, the subcontractor must wait for the contractor to take this action.

• Subcontractor Pays Bond Premium:  The contractor may withhold the subcontractor's portion of the bond premium.

• Deadline for Contractor to Submit Bond:  Within 30 days after the subcontractor's request, the contractor must submit the retainage bond to the public agency, unless "the bond is not commercially available, or the subcontractor refuses to pay the subcontractor's portion of the bond premium and to provide the contractor with a like bond."

• Public Agency Discretion:  The public agency shall accept such a retainage bond that meets its requirements for the content of the bond and from an acceptable bonding company, "unless the public body can demonstrate good cause for refusing to accept it."

Additional Mandatory Bidder Responsibility Criterion:  Senate Bill 5301 adds to the list of mandatory bidder responsibility criteria in RCW 39.04.350 that public agencies must check on and validate prior to awarding any public works project.  The new criterion relates to the contractor's compliance with the state's minimum wage laws.

• Changes
• New Responsibility Criterion:  The new mandatory bidder responsibility criterion reads as follows: "Within the three-year period immediately preceding the date of the bid solicitation, not have been determined by a final and binding citation and notice of assessment issued by the department of labor and industries or through a civil judgment entered by a court of limited or general jurisdiction to have willfully violated, as defined in RCW 49.48.082, any provision of chapter 49.46, 49.48, or 49.52 RCW."  This language should be added to bid documents of public agencies in addition to the currently existing mandatory bidder responsibility criteria.  Language for bid documents is included in the Suggested Guidelines for Bidder Responsibility published by the Capital Projects Advisory Review Board (CPARB).  CPARB will need to revise the Guidelines to add this new criterion.

• Documentation of Compliance:  Documentation to demonstrate a bidder's compliance with this new criterion is also included in SB 5301: "Before award of a public works contract, a bidder shall submit to the contracting agency a signed statement in accordance with RCW 9A.72.085 verifying under penalty of perjury that the bidder is in compliance with the responsible bidder criteria requirement of subsection (1)(g) of this section.  A contracting agency may award a contract in reasonable reliance upon such a sworn statement."  The reference to "subsection (1)(g)" will need to be adapted by public agencies to refer to the section of the bid documents that describes the actual criterion.

• Comments
• Standard Sworn Statement:  Rather than have each public agency develop their own sworn statement as required in the new law, hopefully either the State Department of Enterprise Services (DES) or the Municipal Research and Services Center (MRSC) will develop a standard that all agencies can give to the low bidder to complete as part of verifying their compliance with this additional mandatory bidder responsibility criterion.

On-Call Public Works Contracts Authorized for Public Utility Districts:  For the last five years, there has been considerable controversy in the state about whether public agencies may utilize on-call public works contracts that do not have a specific project scope.  The State Auditor's Office has noted that these contracts are not specifically authorized in state law, and they have begun issuing management letters as part of their review process.  Public Utility Districts (PUDs), under the provisions of Senate Bill 5036, are now authorized to bid and contract for on-call public works contracts.  This new law provides a possible framework for other types of public agencies obtaining the important and necessary authorization for on-call public works contracting. The bill passed the Senate unanimously and almost unanimously in the House with only one opposing vote.

Transit Agencies Authorized to Use Job Order Contracting:  House bill 1395, which passed the Senate unanimously and the House with only two opposing votes, adds "every public transportation benefit area authority as defined under RCW 36.57A.010" to the list of agencies and agency types authorized to use Job Order Contracting, one of three alternative public works contracting methods authorized in RCW 39.10.

Effective Date:  As of the most recent information, none of the bills have yet been signed by the governor, but it is anticipated he will sign them.  The new laws will be effective sometime in June or July.  This website may be used to obtain up to date information about the bills.

Mike Purdy in the News:  I was recently interviewed by and quoted in the following publications:

• Piggybacking:  Fast Company, "Why Taser Changed Its Name and Offered Every Cop a Body Camera," by Alex Pasternack, April 6, 2017

• Presidential History and Politics:  The Huffington Post, "Unaswered Questions About Russia Erode Faith in Democracy," by Cody Lyon, April 4, 2017
  

Mike Purdy's Public Contracting Blog
© 2017 by Michael E. Purdy Associates, LLC
http://PublicContracting.blogspot.com

Court Rejects Owner's Claim Against Bonding Company

After repeated performance deficiencies by a contractor, a public agency in Pennsylvania terminated the contract and filed a claim against the surety that issued the performance bond.  

Owner didn't provide notice and opportunity to cure:  After multiple court motions by both the Milton Regional Sewer Authority (MRSA) and Travelers Casualty & Surety Co. (Travelers), the U.S. District Court ruled in favor of the surety, affirming that MRSA had failed to provide the contractor with proper notice of the performance deficiencies and give them an opportunity to cure the problems prior to termination.  

Owner argues material breach the contract:  MRSA argued unsuccessfully that they were not required to provide the notice and give the opportunity for the contractor to cure the deficiencies because the contractor's lack of performance constituted a material breach of contract that would have allowed them to terminate without the notice and cure processes.   

Court rules no material breach of contract:  The Court disagreed with MRSA, ruling that the deficiencies cited by MRSA did not constitute a material breach of contract.  The contractor was guilty only of "poor performance of the contract, which is precisely within the contemplation of the cure provision in the contract." 

More information:  

• June 24, 2014 Court decision

• Article: "U.S. district court in Pennsylvania dismisses owner's claim against performance bond surety - repeated instances of poor performance by contractor were not so material as to allow owner to terminate without providing cure notice," by James M. Kwartnik, Jr, Attorney with Pepper Hamilton LLP, November 25, 2014 

Lessons learned:  If a contractor is not performing consistent with the contract documents, public agencies should:

• Document:  Thoroughly document deficiencies and the contractor's actions that are at variance with the contract documents.

• Keep surety informed:  Communicate clearly and often with the bonding company about the deficiencies.

• Abide by notice and cure provisions:  Follow the notice requirements of the contract for providing the contractor with the opportunity to cure deficiencies.

Presidential History:

• Presidential History Blog:   While I will discontinue writing my Public Contracting Blog on March 5, 2015, you can sign up for a free email subscription to my Presidential History Blog at www.PresidentialHistory.com.  On a case-by-case basis, I will only be accepting limited consulting and training opportunities after March 5, 2015.

• Presidential History News:  Be sure to watch my 6 minute video at www.PresidentialHistory.com in which I report "live" on the election returns for the 1916 presidential election between Woodrow Wilson and Charles Evans Hughes.
  
  
• Twitter and Facebook:  Follow me on Twitter @PresHistory and "Like" my Facebook page at https://www.facebook.com/mikepurdypresidentialhistory.

Mike Purdy's Public Contracting Blog
© 2015 by Michael E. Purdy Associates, LLC
http://PublicContracting.blogspot.com

How Do Change Orders Impact the Amount of Payment and Performance Bonds?

Typically, a public agency will obtain a Payment Bond for 100% of the contract amount and a Performance Bond for 100% of the contract amount.  

But what happens if there are change orders to the project that increase the dollar amount of the contract?  Do the bonds cover the amended contract amount from both a payment and performance perspective? 

3 options:  There are three options of how these bonds respond to an increase in the contract amount through change orders.

• Surety approval always required:  Under this alternative, any change order, regardless of the dollar amount, must receive approval from the surety for the increased amount so that the bonding company can issue a "rider" or amendment to the bonds and increase the dollar amount of protection under the bonds.  Administratively, this can be burdensome, and can slow down the approval process for change orders and payment to the contractor.

• Surety approval sometimes required:  Under this alternative, approval of the surety is required only for change orders of a certain dollar amount or a certain percentage (singular or cumulative).  The bonding company's approval would again be issued in the form of a rider to the bonds.  Like the first option, this alternative is also administratively cumbersome.

• Surety approval never required:  Under this preferred option, by issuing and signing the Payment and Performance Bonds, the bonding company agrees to any and all future change orders that may change the amount of the contract.  From an administrative perspective for the public agency, contractor, and bonding company, this is the most streamlined way to address changes in the contract amount. 

Communicate your policy:  Public agencies should communicate clearly in the bid and contract documents their expectations of which option will apply.  Language must also be reflected in the actual Payment and Performance Bonds (a strong argument why agencies should have their own bond forms that must be used).  If the third option above is used, here is potential language to include in the bid and contract documents as well as the bonds:

The Surety for value received agrees that no change, extension of time, alteration or addition to the terms of the Contract, the specifications accompanying the Contract, or to the work to be performed under the Contract shall in any way affect its obligation on this bond, except as provided herein, and waives notice of any change, extension of time, alteration or addition to the terms of the Contract or the work performed. The Surety agrees that modifications and changes to the terms and conditions of the Contract that increase the total amount to be paid the Principal shall automatically increase the obligation of the Surety on this bond and notice to Surety is not required for such increased obligation.

Mike Purdy's Public Contracting Blog
© 2015 by Michael E. Purdy Associates, LLC
http://PublicContracting.blogspot.com

What Requirements Still Apply for Emergency Public Works Contracts?

When a public agency has declared an emergency and waived competitive bidding requirements for a public works construction project, what is being waived is the contractor bidding and selection process.  In other words, under an emergency contract seeking bids is not required.  

Not enough time to conduct a bid process:  The nature of emergencies dictates that there is not sufficient time to conduct a bid process without raising the risk that individuals may be injured, property damaged, or that the essential functions of government may not be fulfilled.  The definition of an emergency public work varies by state. In Washington state, it is defined in RCW 39.04.280. 

What is required for emergencies:  The following is a list of some of the requirements that still apply for emergency public works projects.  Generally, only the selection process is waived through the emergency declaration.  While this list is based on Washington state law, portions of it may also apply for other states, depending on their specific requirements:

• Declaration of emergency:  A formal declaration of an emergency must be made.  See RCW 39.04.280.

• Bidder Responsibility:   The mandatory bidder responsibility criteria of RCW 39.04.350 still apply for emergency contracts.

• Contract:  There should still be a public works contract documenting the various requirements and the dollar amount of the project, even if it is for a time and materials, not-to-exceed amount.

• Prevailing wages:  Prevailing wages must still be paid consistent with the requirements of RCW 39.12.

• Intent:  A Statement of Intent to Pay Prevailing Wages must be approved by the Department of Labor and Industries and filed with the public agency prior to making any payments to the contractor.  A separate Intent must be completed for the contractor and each subcontractor, regardless of tier.

• Affidavit:  An Affidavit of Wages Paid must be approved by the Department of Labor and Industries and filed with the public agency prior to making payment of retainage to the contractor.  A separate Affidavit must be completed for the contractor and each subcontractor, regardless of tier.

• Bonds:  A payment and performance bond must be submitted to the agency for the work, in accordance with RCW 39.08.

• Insurance:  The amounts and types of insurance required on a public works project are governed by each agency and not by Washington state law. 

• Retainage:  Retainage should be withheld from each progress payment.  See RCW 60.28.  The only exceptions to not withholding retainage is if a retainage bond is submitted by the contractor or if the contractor was selected through the Limited Public Works process under the Small Works Roster (for public works projects less than $35,000), in which case there would have been no need to waive the competitive bidding process.

Timing of emergencies:  While the above items are still required under Washington state law for an emergency public work, agencies must ensure that health, safety, and property are protected and that an agency's essential functions continue to serve the public.  Sometimes, due to the emergency nature of the project, it is important to get a contractor on the job site immediately, perhaps in the middle of the night, to address the emergency.  In such a case, often some of the paperwork requirements are addressed after the fact. 

Emergency procedures:  Washington state law does not have exemptions for public works requirements on emergency projects, other than for the actual bidding and selection process.  It is important that each public agency have clear emergency public works procedures that will dictate:

• Compliance:  The timing of compliance with the requirements of state law.

• Authorization:  Who within the agency is authorized to declare an emergency and waive competitive bidding.  This person or persons should be available at any time, which is why it is often problematic to dictate that only an elected board or council may waive competitive bidding.
  

Mike Purdy's Public Contracting Blog
© 2014 by Michael E. Purdy Associates, LLC
http://PublicContracting.blogspot.com

Training on Construction Bidding and Contracting

I am teaching three courses for NIGP at various locations across the country.  If you're interested in having me teach any of these classes for your NIGP chapter or public agency, please contact Faye Jackson at NIGP directly at FJackson@nigp.org.  If you're within Washington state, contact me directly. Here's a description of the courses.

Maryland State Capitol
in Annapolis

When Bad Things Happen to Bids: Strategies for Ensuring Successful Public Construction Projects:   I was in Annapolis, Maryland on September 12, 2014 teaching this course.  Here's an outline of this one day course: 

Why Aren’t Bidders More Careful?

• Why Do Bidders Make Mistakes?
• Missing Bid Prices
• Conflict Between Numbers and Words
• Bid Calculation Errors
• Claims of Error

Is Your Bidder Playing Games?

• Bid is Too Low
• Incentive Payments
• Unbalanced Bids
• Conditioned or Qualified Bids

Will the Real Low Bidder Please Stand Up?

• Additive and Alternate Bids
• Tie Bids
• Responsive Bids
• Responsible Bidders
• Local Bid Preferences
• Bid Protests and Appeals
• Conflicts of Interest

What Can You Do to Manage Bidding?

• What Should Be on the Bid Form?
• Why Should You Limit Submissions with the Bid?
• On What Days Should You Not Receive Bids?
• When is a Bid Late?
• When Should You Take a Bid Guaranty?

Best Practices in Developing Public Construction Bid Documents:  I'll be teaching this course on October 27 in Savannah, Georgia.  Here's an outline of this one day course:

Principles of Preparation

Formats and Structures

• Organizational Structures
• Content Based Systems
• What Are the Pros and Cons of Using Industry Approved Documents?

Components of Bid Documents

• Advertisement for Bids
• Instructions to Bidders
• Bid Form
• Payment and Performance Bonds
• Bidding and Contract Reporting Forms
• Contract
• General Conditions / Specifications
• Technical Specifications
• Prevailing Wages
• Specialty Reports and Studies
• Addenda

Project Review of Bid Documents

• Do the Bid Documents Reflect Your Objectives?
• What Provisions Should You Tailor to a Project?
• Who Should Review the Documents Before Advertisement?

Long Term Review of Bid Documents

• Baseline Review
• Annual Review
• Internal and External Consistency
• Training

Document Management and Control

• How Can You Protect Your Standard Documents?
• Where Should the Standard Documents be Electronically Stored?
• Who Should Make Changes to Your Standard Documents?
• How Can You Keep Track of Changes?

Procurement Tools for Ensuring Contractor Performance on Public Construction Projects:  I'll be teaching this class on November 3 in Phoenix, Arizona and then again on November 17 in Hagerstown, Maryland.  Here's an outline of this one day course: 

Is the Contractor Qualified?

• Pre-qualify Bidders
• Establish Bidder Responsibility Criteria
• Specification Qualification Requirements
• Subcontractor Approval Process

How Can You Manage the Bidding Process?

• Develop Clear Bidding Documents
• Optional vs. Mandatory Pre-Bid Meetings
• Craft Clear Addenda
• Accept Bidder’s Claim of Error

How Can Bonding Companies Help?

• Bid Bonds and Other Bid Guaranties
• Performance Bonds
• Payment Bonds
• Warranty Bonds

What Financial Tools Are at Your Disposal?

• Withhold Retainage
• Determine and Assess Liquidated Damages
• Assess Actual Damages
• Obtain Release of Claims Prior to Payments

What Are Effective Construction Management Practices?

• Avoid Front-Loaded Schedule of Values
• Inspect Work Performed
• Review Pay Applications for Work Completed
• Manage Claims Process
• Control Change Orders Approved

Can You Evaluate Contractor Performance?

• Features of Effective Contractor Performance Evaluation Programs
• Using Results from Contractor Evaluations

When Can You Award Based on Price and Qualifications?

• Best Value Procurement
• Design-Build
• Construction Manager at Risk
• Job Order Contracting

Mike Purdy's Public Contracting Blog
© 2014 by Michael E. Purdy Associates, LLC
http://PublicContracting.blogspot.com

Free Bonding Education Program Workshop

Many public agencies have policies that encourage the use of small, socio-economically disadvantaged businesses and those owned by women and minorities. On public works construction projects, one of the long-standing impediments for these businesses to participate on public projects is the inability to obtain a payment and performance bond. 

Target audience:  

• Small and Emerging Contractors:  This workshop will provide tools for small and emerging contractors to get to the point where they can obtain the required bonding.

• Transportation Contractors:  The program is tailored to contractors competing for transportation related contracts, but is open to all contractors seeking to expand their business and run their operation more effectively.  

• Public Agencies:  The workshop will also be valuable for public agencies seeking to understand better some of the challenges faced by small contractors in obtaining bonding.  

When: 5 classes on the following dates from 5:00 pm to 8:30 pm (attendance at all five classes is required).  Includes a free dinner.

• October 16, 2014
• October 23, 2014
• October 30, 2014
• November 4, 2014
• November 18, 2014

Where:  New Holly Gathering Hall, 7054 32nd Ave. South, Seattle, WA 98118

Agenda:

• Bonding Fundamentals & Managing Growth
• Banking and Financing for Contractors
• Loan Application Package
• Construction Accounting and Financial Management
• Estimating and Bidding
• Credit Repair
• Prevailing Wage Law
• Contracts and Clauses

Questions:  Call (425) 248-4222

Sponsored by:

• Surety & Fidelity Association of America (SFAA)

• U.S. Department of Transportation, Northwest Small Business Transportation Resource Center

• Sound Transit   

Registration:  Click here to register online.

Mike Purdy's Public Contracting Blog
© 2014 by Michael E. Purdy Associates, LLC
http://PublicContracting.blogspot.com

Two Types of Fraudulent Bonds

Public agencies regularly require a variety of bonds from contractors including bid bonds, performance bonds, payment bonds, retainage bonds, and warranty bonds.  The bonds are backed by sureties that promise to step in and protect the public agency if a contractor fails to meet their various obligations described in the bond.  If a bond is not legitimate, however, a public agency has no protection.  There are a couple of different scenarios of how fraudulent bonds are issued. 

Fraudulent representation as a surety:  Some individuals have posed as brokers representing bonding companies, issued fraudulent bonds, and collected bond premiums from unsuspecting contractors who then submit the bogus bonds to public agencies.  Last year, a report in Engineering News-Record described how 22 contractors in nine states lost more than $3 million to two men who claimed to be authorized to issue bonds for Chubb subsidiaries Pacific Indemnity Co. and Federal Insurance Co. 

Fraudulent bonds:  Some contractors have used Photoshop and copy machines to dummy up bonds that they then submit to public agencies to comply with bonding requirements for a contract they have been awarded.  Agencies who unwittingly accept such bonds end up with no protection from these bogus bonds, nor has there been any financial review by a surety of the contractor's financial stability.  Click here to read a previous blog posting discussing verifying bonds and referencing a number of forged bond cases.  

Is a bond legitimate?  It is a prudent business practice for public agencies to verify with the bonding company that a bond has been issued.  Bonding companies authorize others, known as an "attorney-in-fact" to obligate the surety.  The attorney-in-fact must, however, report to the surety when they have issued a bond.

• Research the surety's phone number:  Independently research the surety's phone number.  Do not rely on a phone number that may be on the bond.

• Call the surety:  Call the surety to verify the legitimacy of the bond.  

• Verify for all or some contractors:  Some public agencies do not verify bonds for well-known contractors they have done business with for years, and that pose a low risk.  However, researching the legitimacy of a bond for a new or unknown contractor is a good idea.

Mike Purdy's Public Contracting Blog
© 2014 by Michael E. Purdy Associates, LLC
http://PublicContracting.blogspot.com

NJ Prohibits Financial Statements in Bid/Proposal Processes

The New Jersey legislature has approved a bill that would prohibit public agencies from requiring bidders and proposers from submitting a financial statement if a bid guaranty (bid bond, cashier's check, certified check) is submitted. A bid guaranty is a measure of protection for the public on the financial viability of the bidder/proposer.

Unanimous support:  A-1794 passed both the New Jersey Senate and Assembly unanimously in June 2014.  

Purpose of bill:  The bill was promoted as a means to encourage small businesses to participate in public contracting, and not impose on businesses an often onerous, costly, and time-consuming process of obtaining and providing a financial statement to demonstrate financial viability.

Exception:  The bill includes an exception for any federally funded project that requires submission of a financial statement by bidders or proposers as a condition of a public agency receiving a grant.

Public records:  Prohibiting submission of financial statements also eliminates the situation in which confidential information must sometimes be disclosed under public records laws.

Mike Purdy's Public Contracting Blog
© 2014 by Michael E. Purdy Associates, LLC
http://PublicContracting.blogspot.com

Researching Bonds and Bonding Companies

Bonding companies (also known as sureties) play an important role in public works construction contracting.  Sureties issue bonds for the following:

• Bid Bonds: The bonding company agrees to pay the public agency a specified dollar amount or percentage of the bid amount if the bidder is awarded a contract by the the public agency, but fails to execute or sign the contract.  Click here for a previous blog posting on limitations on the bid bond amount.

• Payment Bond:  A payment bond is a guarantee by the surety that the contractor will pay their subcontractors, suppliers, and workers on the project. If the contractor fails to do so, an unpaid party may file a claim against the payment bond and collect from the surety.

• Performance Bond:  With a performance bond, the surety stands behind the contractor and guarantees that the contractor will faithfully perform according to all of the terms and conditions of the construction contract.  In the event the contractor fails to do so, the surety agrees to pay for the completion of the project.

• Warranty Bond:  A warranty bond, also known as a maintenance bond, is the guaranty of the surety that the contractor will perform and pay subcontractors, suppliers, and workers during a warranty period.  The payment and performance bond will typically cover a one year warranty period after the substantial completion date of a project.  A warranty bond may be required by a public agency if the agency desires a warranty period for longer than one year.

Is the surety financially strong?  Public agencies require bonding companies to make guarantees to ensure the contractor performs.  But how do we know that a surety will be able to fulfill its financial obligations?  One indicator of a bonding company's financial capacity comes from ratings given by an independent private company, A.M. Best.  A.M. Best rates sureties on two factors that should be considered together:

• Financial Strength Rating:  A.M. Best assigns letter grades to sureties with scores of A++, A+, A, A-, B++, and B+ representing secure bonding companies.  Sureties that are rated B through F (or S for suspended) represent vulnerable sureties.  Many public agencies require that the bonds submitted by contractors be from bonding companies with a specified minimum rating.

• Financial Size Category:  A.M. Best also rates sureties based on their financial size using what is referred to as "adjusted policyholders' surplus" (PHS).  The higher the Roman numeral rating, the larger financial capacity of the bonding company.  For example, a surety rated as "class I" has an adjusted PHS less than $1 million, while a firm rated as "class VII" has an adjusted PHS of $50 to $100 million.  Like the Financial Strength Rating, many public agencies require that the bonds submitted by contractors be from bonding companies with a minimum Financial Size Category rating.

What is a good surety rating?  I frequently see public agencies requiring that bonds be from a sureties with an A.M. Best rating of A- VII, or something similar.  Do your bid and contract documents require a minimum A.M. Best rating for sureties? 

How can you verify a surety's A.M. Best rating?  A.M. Best makes their ratings available online at http://www.ambest.com/.  To access the ratings, you do need to sign up on their website.  The registration and access to the information is free. 

Does the government rate sureties?  The federal government maintains a list of approved sureties and state agencies often have lists of sureties authorized to do business in that state.

• Federal:  Public agencies can verify that a surety is on the federal list by going to the U.S. Department of the Treasury's Listing of Approved Sureties (Circular 570) at the following website:  http://www.fms.treas.gov/c570/c570_a-z.html.

• State:  The State of Washington, as an example, through its Insurance Commissioner's Office, publishes a list online of sureties authorized to do business in the state at the following website: http://www.insurance.wa.gov/consumertoolkit/search.aspx

Is a bond legitimate?  With advanced technology today, there are more and more cases of forged bonds.  Click here to read a previous blog posting discussing verifying bonds and referencing a number of forged bond cases.  It is a prudent business practice for public agencies to verify with the bonding company that a bond has been issued.  Bonding companies authorize others, known as an "attorney-in-fact" to obligate the surety.  The attorney-in-fact must, however, report to the surety when they have issued a bond.  

• Research the surety's phone number:  Independently research the surety's phone number.  Do not rely on a phone number that may be on the bond.

• Call the surety:  Call the surety to verify the legitimacy of the bond.  

• Verify for all or some contractors:  Some public agencies do not verify bonds for well-known contractors they have done business with for years, and that pose a low risk.  However, researching the legitimacy of a bond for a new or unknown contractor is a good idea.

Mike Purdy's Public Contracting Blog
© 2014 by Michael E. Purdy Associates, LLC
http://PublicContracting.blogspot.com

Free Training on Insurance and Bonds

Insurance and Bonds 

When:

• February 6, 2014 (Renton, WA)
• February 13, 2014 (Yakima, WA)
• February 20, 2014 (Camas, WA)
• February 27, 2014 (Everett, WA)

Sponsored by:

• APWA-Washington Chapter, Contract Administration Subcommittee (CASC)

• MRSC (Municipal Research and Services Center)

Cost:  Free

Instructors: 

• Pamm Jardine, Kibble & Prentice, A USI Company
• Stuart O’Farrell, Parker, Smith & Feek

Information and registration:  Click here. 

Mike Purdy's Public Contracting Blog
© 2014 by Michael E. Purdy Associates, LLC
http://PublicContracting.blogspot.com

Why Should You Obtain Separate Payment and Performance Bonds

Most public agencies require some form of bond from contractors on public works construction projects.  The bonding company (or surety) issuing the bond stands behind the contractor to guarantee that the contractor will:

1. Perform the work in accordance with the contract documents, and 
2. Pay their subcontractors, suppliers, and workers

Separate and combined bonds both available:  Sometimes performance and payment bonds for public works construction projects come in the form of one bond, and sometimes they are obtained as two separate bonds. 

Separate bonds protect agency more:  Separate performance and payment bonds, each for 100% of the contract amount, protect the public agency more, without additional cost to the contractor (or agency).

Which bond is more important?  To understand why separate bonds protect a public agency more than a combined bond, we must first understand the purpose of the performance and payment protections.

• Public agencies care more about the protections of the performance bond.  In other words, the public agency wants to ensure that a surety is backing the contractor and guaranteeing the successful completion of the project.

• A payment bond, on the other hand, is for the protection of others: subcontractors, suppliers, and workers.

What's the problem with a combined bond?  While a combined performance and payment bond may seem to be more efficient (one bond instead of two), it is not as effective in protecting public agencies.  In other words, for every claim filed (and paid) against the payment protections of a combined bond, there is correspondingly less money available under the bond to protect the public agency and ensure that the contractor successfully performs the work.  On a project with multiple payment claims, it may be an indicator that there will be performance problems as well.

Why two bonds are better than one:  A public agency's strongest position is to have performance protections from a surety for 100% of the contract amount that does not get reduced by payment claims against a combined bond.  Sureties do not charge contractors more to obtain separate performance and payment bonds, and the separate bonds ensure that the public is better protected.

Separate bonds on FHWA funded projects:  Washington State's Department of Transportation (WSDOT), through their Highways and Local Programs Department, recently approved the use of separate payment and performance bonds for local agencies on FHWA funded projects.  APWA's Division 1 Committee has developed separate sample bond forms that may be used on FHWA funded projects, or projects with other funding.  The separate bond forms are available on the APWA Division 1 Committee's website (http://www.apwa-wa.org/committee.aspx?id=5).

Note:  This blog posting is a repeat of one from October 2, 2012.

Mike Purdy's Public Contracting Blog 
© 2012-2013 by Michael E. Purdy Associates, LLC 
http://PublicContracting.blogspot.com

Detecting Counterfeit Payment and Performance Bonds

Changes in technology have given rise to a number of cases where contractors have forged Payment and Performance Bonds, leaving the public unprotected.

What do bonds do?  Most public agencies require Payment and Performance Bonds for public works construction projects.  These bonds are important tools to protect the public in the event the contractor either fails to pay subcontractors, suppliers, and workers, or the contractor fails to perform the work.

Check the bonds:  Here's a quick list of things to do to help ensure that the Payment and Performance Bonds you receive from contractors are not counterfeit.

• Evaluate the contractor's reputation:  Have you done business with the contractor in the past?  What is their reputation?  Are they are new and unknown contractor?   If you aren't familiar with the contractor, you may want to investigate the legitimacy of the bonds. 

• Review the bonds:  Are there irregularities or inconsistencies in the bonds?  Is the bond form current?  Are all of the dates, including those on the Power-of-Attorney document current?  The last date on the Power-of-Attorney should be within the last six months to year.

• Verify the bonds independently:   Contact the actual bonding company backing the bond, not the attorney-in-fact who signed the bond on behalf of the bonding company.  Research the contact information for the bonding company independently and don't rely on a phone number provided on the bond.  One California contractor set up a separate cell phone number they included on a forged bond in the event a public agency called to verify the bond.  Contact the surety to verify that the bond was appropriately issued by the attorney-in-fact.

Examples of bond forgeries:  Here are a couple of stories of forged bonds by contractors:

• New Jersey contractor jailed for forgery.  Click here to read the entry from my blog on June 12, 2011.  

• California contractor pleads guilty to forging payment and performance bonds.  Click here to read the entry from my blog on September 25, 2011.     

• New York City contractor submits phony bonds to Housing Authority. Click here for details. 

• Washington state contractor forges bonds. Click here for details.  

Note:  This blog posting is a repeat of one from October 29, 2012.

Mike Purdy's Public Contracting Blog 
© 2012-2013 by Michael E. Purdy Associates, LLC 
http://PublicContracting.blogspot.com

Should Payment and Performance Bonds Cover Sales Tax Amounts?

Public agencies in the State of Washington are required, with limited exceptions, to obtain both a Payment Bond and a Performance Bond for each public works project. 

The Question: 

• Is it required that the dollar amount of these bonds include sales tax that is added to each progress payment paid to the contractor? or 
• Is it acceptable for a contractor to submit the bonds without the sales tax amount? 

A lower dollar amount of the bonds may result in a lower bond premium amount the contractor is required to pay to the surety, and thus a lower cost to the public agency. 

Current Practices:  From what I've gathered, some public agencies require the sales tax amount be included, while others exclude it from the amount of the bonds. 

What is the "Full Contract Price"?  RCW 39.08.030 states that the Payment Bond and Performance Bond must be "in an amount equal to the full contract price agreed to be paid for such work or improvement."  Does the "full contract price" include or exclude sales taxes paid separately by the public agency to the contractor?

While RCW 39.08.030 does not specifically address sales tax, it states that the "full contract price" is for the "work or improvement" defined in the specifications - which I would interpret to be the physical construction work, and not sales taxes.  Based on this, a public agency could make the argument that the amount of the Payment Bond and Performance Bond does not need to include sales tax. 

Payment Bond:  RCW 39.08.010 states that under a Payment Bond the bonding company guaranties that the contractor shall "pay all laborers, mechanics, and subcontractors and material suppliers."  Payment to the State Department of Revenue of sales taxes by the contractor from such amounts paid separately by the public agency to the contractor is not listed as one of the protections of the Payment Bond, (unless the project is a federally funded transportation project in which case the Payment bond must protect the Departments of Revenue, Employment Security and Labor and Industries since no retainage may be withheld on these projects).  The Department of Revenue is a beneficiary of Retainage withheld by public agencies for unpaid taxes, but is not protected by the Payment Bond.

Another way to look at this issue is to ask whether the Department of Revenue would be successful in collecting from a bonding company for unpaid sales taxes, if the language of the Payment Bond mirrored the language of RCW 39.08.010 in ensuring payment to "all laborers, mechanics, and subcontractors and material suppliers."  It seems unlikely that the Department of Revenue would be able to make a successful argument with the bonding company that unpaid sales taxes should be paid by the bonding company under the Payment Bond. 

Performance Bond:  RCW 39.08.010 states that the purpose of the Performance Bond is for the bonding company to guaranty that the contractor "shall faithfully perform all the provisions of such contract." 

There are two ways to understand this.  First, the "provisions" of the contract can be understood to include all of the provisions of the contract documents for performing the physical work.  Second, you could also understand that requirement to pay sales tax is a "provision" of the contract, and that the amount of the Performance Bond should therefore include sales tax.  However, it seems to me that sales tax is more an issue of whether it is paid than whether it is performed. 

Options:  A public agency can take one of at least three positions with respect to the amount of the Payment Bond and Performance Bond:

• Require that the amount of the bonds include sales tax.  If an agency chooses this approach, the language of the Payment Bond should specify that payment of sales taxes is protected under the Payment Bond.   Likewise, the language of the Performance Bond should specify that payment of sales taxes is considered an issue of faithfully performing all the "provisions" of the contract.  I don't know how bonding companies would respond to requests for this supplemental language in the bonds.  Note that under this option, payment of sales tax would be covered under both the Payment Bond and the Performance Bond.

• Require that the amount of the Payment Bond includes sales tax, but not the amount of the Performance Bond.  This option recognizes that it is easier to make the argument (through added Payment Bond language) that sales tax is covered under the Payment Bond.  This option also recognizes that it is more difficult to make the argument that the Performance Bond should include payment of taxes. Finally, under this option, coverage of sales tax isn't doubled up under both bonds.

• Require the amount of both bonds exclude sales tax.  This option recognizes the language of RCW 39.08.010 that does not include sales tax as a protected category for the Payment Bond, and acknowledges that payment of sales tax is not a performance issue for the contract, at least as performance is typically understood.

Consult Your Attorney:  Public agencies have a variety of practices on this issue.  You should consult with your attorneys to help you understand the best option for your agency.  It is important for agencies to think deliberately about their comfort level with each of the options. 

Other States:  Obviously other states have different laws relating to Payment Bonds and Performance Bonds, and I would likewise be very interested in hearing how other states address this issue.

Feedback:  I am very interested in hearing what your practice is and what you ultimately decide to require as the amount of your Payment and Performance Bonds.  Please contact me with with your thoughts and questions.

Note:  This blog posting is a repeat of one from August 30, 2010.

Mike Purdy's Public Contracting Blog 
© 2010-2013 by Michael E. Purdy Associates, LLC 
http://PublicContracting.blogspot.com

Training: Tools for Contractors to Obtain Bonding

Tools for Contractors to Obtain Bonding:  One of the difficulties that small contractors on public works projects often face is the ability to obtain required payment and performance bonds. When making bonding decisions, sureties often evaluate a contractor's business development strategies and plans, including their approach to marketing, sales, and identification of market segment. This workshop is designed to provide small contractors with an overview of what bonding companies look for in a business development plan.

When:  September 26, 2013 (5:00 p.m. to 7:30 p.m.)

Where:  Shoreline, Washington (WSDOT Shoreline Facility, 15700 Dayton Avenue North)

Speaker:  Darryl Russell

Cost:  No cost, prior registration required.

Sponsored by:  Small Business Transportation Resource Center (SBTRC) of the U.S. Department of Transportation

Information and registration:  Click here.

Mike Purdy's Public Contracting Blog
© 2013 by Michael E. Purdy Associates, LLC
http://PublicContracting.blogspot.com 

Demystifying Public Works Bidding and Contracting

On September 5, 2013, I was in Ephrata, Washington providing an all day training session for the Grant County Public Utility District staff on Demystifying Public Works Bidding and Contracting.

Here's an outline of the training I provided:

Types of Public Works Contracts

• By agency staff
• Advertised Public Works
• Small Works Roster (Limited public works)
• On-Call Public Works
• Alternative Public Works (GC/CM, Design-Build, Job Order Contracting)
  

Bid and Agency Limits on Performing Public Works

What is a Public Work? 

• What is Ordinary Maintenance?
• Is Maintenance a Public Work?

Why Aren't Bidders More Careful?

• Why Do Bidders Make Mistakes?
• Missing Bid Prices
• Conflict Between Numbers and Words
• Bid Calculation Errors
• Claims of Error

Is Your Bidder Playing Games?

• Bid is Too Low
• Unbalanced Bids
• Conditioned or Qualified Bids

Will the Real Low Bidder Please Stand Up?

• Additive and Alternate Bids
• Tie Bids
• Responsive Bids
• Responsible Bidders
• Local Bid Preference
• Bid Protests and Appeals

When You Don't Want a Check

• Purpose of Bid Guarantees
• Types of Bid Guaranties
• The Risks of Checks
• Are Bid Guarantees Required on Small Works Roster Projects?
• Amount of Bid Guarantees
• Restrictions on Bid Bond Amounts
• What is a Power of Attorney?
• How Much Does a Bid Bond Cost?
• When Should You Return Bid Bonds?
• Checklist for Bid Bonds

Payment and Performance Bonds

• Purpose of Payment and Performance Bonds
• Why Should You Get 2 Separate Bonds?
• Bonds vs. Insurance
• Are Bonds Required on All Public Works Projects?
• When Should the Bonds Be Obtained?
• What Happens if You Fail to Get the Bonds?
• Should the Bonds Cover Change Orders?
• Should the Bonds Cover Sales Tax?
• Are Bonds Ever Forged?
• What Happens if the Contractor Defaults?
• Checklist for Bonds

When Bad Things Happen During Construction

• Front Loaded Schedule of Values
• Dealing with a Change Order Artist
• Prevailing Wages Not Paid
• Subcontractors and Suppliers Not Paid
• Work Not Completed on Time
• Punch List Work Not Completed
• Warranty Work Ignored by Contractor

Public Works Contract Close-out

• Who Does Retainage Protect?
• Completion Dates
• Filing, Renewing, and Releasing Claims
• Pre-Claim Notices
• Foreclosure and Payment
• Release of Retainage
• What Happens if There's Not Enough Retainage
• Check Your Bidding and Contract Documents

Questions:  If you'd like to talk about me providing this training for your agency or association, please contact me.

Mike Purdy's Public Contracting Blog 
© 2013 by Michael E. Purdy Associates, LLC 
http://PublicContracting.blogspot.com