Surety Bonds on P3 Agreements: Sound Public Policy Protections
The federal government long has recognized the importance of surety bonding requirements for its direct public works procurements. The federal Miller Act (40 USC 3131-3134), enacted in 1935, and related regulations, require that payment and performance bonds be in place on any direct federal construction contract in excess of $150,000 (all states have similar requirements known as Little Miller Acts.) The performance bond assures the public entity and taxpayers that the construction contract will be performed fully according to its terms and conditions. The payment bond provides invaluable protection to parties furnishing labor or materials on federal construction projects in assuring that they will be paid. Currently, states and the federal government are considering public private partnerships (P3s) as a new procurement method to get needed public works projects completed. Under traditional methods of procurement, the public entity lets a contract to a private construction company, based on a public design and paid for with public funds. Under a P3, the public entity contracts with the private partner, who in turn hires the construction contractor for the public works project and pays the contractor. The public entity commits public funds to repay the private partner over a long period of time, ranging from 30 to 99 years.
While a P3 infrastructure project may be managed by a private entity, the completed project is for the benefit and welfare of the public and will revert to an asset of the government at some future point. Bonding requirements on projects undertaken for public benefit and welfare through P3 arrangements ensure proper prequalification of entities performing construction services; guarantees of performance from solvent, third-party corporate sureties; and payment remedies for certain unpaid subcontractors and suppliers. Furthermore, when the federal government provides loans and/or grants through programs such as Transportation Infrastructure Finance & Innovation Act (TIFIA), and/or the Water Infrastructure Finance & Innovation Act (WIFIA) agreements for P3s, bonds should be required for the construction portion of the contract as they would be for traditional public works projects for the same policy arguments. This is why ASA supports H.R. 1740, which would allow performance and payment bonds on P3 projects supported by WIFIA financing.