ASA Supports Reps. Lynch (D-MA) and Balderson (R-OH) Amendment to H.R. 3684
On Wednesday, June 9, 2021, the House Transportation and Infrastructure Committee considered H.R. 3684, the INVEST In America Act, and ASA supported the Lynch/Balderson amendment to it, which mirrored their legislation, H.R. 1641, “The Promoting Infrastructure by Protecting Our Subcontractors and Taxpayers Act.” For nearly a hundred years, the federal government has recognized the importance of surety bonding requirements for its direct public works projects. Surety bonds play a vital role in ensuring contractors in financial distress avoid bankruptcy, allow subcontractors and workers of public works projects to receive compensation and allow the project to be delivered within budget and on time. Over 95% or more of all public projects require bonding under the Miller acts. However, Miller acts’ bonding requirements are not clear on public private partnerships (P3s), and therefore often do not maintain the same level of protections that have been required on public infrastructure projects over the past century.
This loophole/gap in some laws for P3 projects, which carry the same risk in the design and construction portion as traditional infrastructure projects, leaves workers and taxpayers exposed to unnecessary risk. Without these protections, in the event of a contractor default, the project is halted, and can be terminated, leaving subcontractors and workers without pay. Additionally, states and taxpayers then are forced to absorb additional costs of rebidding the project.
Why P3 projects need surety protection?
- Changing business environment - The P3 project delivery method is growing in popularity. However, many large and respected contractors are getting out of P3 work citing it is too risky to guarantee profits. Although the P3 delivery model offers unique advantages, many contractors assert that fixed-price agreements lock contractors into a set fee and timetable, which often leads to costly disputes between owner and contractor about who will pay for additional incurred expenses. The potential result of large contractors leaving the P3 marketplace is that less established and smaller contractors will likely bid on these P3 megaprojects moving forward, creating a greater need for adequate payment and performance protections. Although our associations are supportive of the P3 delivery model, and all delivery models that help build public infrastructure, we strongly believe the design and construction risks are too great to allow these projects to move forward without payment security in place for downstream parties. Construction is inherently a risky business with 25% of all contractors go out of business every year—second most risky business next to restaurants.
- External Economic stress - History has shown that economic trends could add stress on contractors. In the years following the passage of the American Recovery and Reinvestment Act of 2009, the number of contractor defaults resulting in large loses increased over 100%, reaching a peak in 2011 when the surety industry recorded over 150 unique large losses in in one year. This trend could return as the construction sector deals with potential labor shortages and higher costs for materials.
- Value of bonds – A recent study conducted by the Canadian Center for Economic Analysis evaluated 150,000 bonded projects over the last 20 years completed by over 10,000 different construction firms. The findings of this report determined that bonds have significant economic value, asserting that non-bonded contractors are 10 times more likely to become insolvent compared to bonded contractors and that surety bonds protect a minimum $3.5 million worth of GDP for every $1 million spent on surety bond premiums.
Surety protects taxpayers and small businesses. The need for these bonds is hidden by their success. Sureties protected approximately $3 trillion of public works projects from 2009-2019 in the U.S. In 2017 through 2019 alone, sureties paid over $2.6 billion in connection with contractor defaults and “at risk” federal, municipal, and state projects in the U.S. The loss experienced on projects would be drastically higher if it weren’t for the surety industry that prequalifies contractors on public jobs. Sureties serve as a strong front end risk management tool for the public sector, ensuring that only qualified contractors, who are able to complete the job, are allowed to bid on public jobs. If surety bonds are not required, the responsibility of vetting all contractors who apply for procurement work would fall back on the public sector, including the costs of rebidding the project in the event a contractor defaults.
The policy solution we are supporting is articulated in the bipartisan, bicameral bill, H.R. 1641, the Promoting Infrastructure by Protecting Our Subcontractors and Taxpayers Act. The bill addresses the shortcoming mentioned above by directing U.S. DOT to ensure P3 projects using Transportation Infrastructure Finance Innovation Act (TIFIA) financing have appropriate payment and performance security and are sound federal investments by requiring a surety bond. It is a commonsense solution to a complex problem. Adoption of Lynch-Balderson amendment would include this policy in the surface transportation reauthorization and would deliver these much-needed protections.