Kansas Subs and Suppliers Win Important Payment Protections on P3 Construction Projects
American Subcontractors Association, Inc.
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FOR RELEASE April 12, 2017
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Subcontractors and Suppliers in Kansas Win Important Payment Protections on Construction Projects Financed Through P3 Arrangements
ALEXANDRIA, Va.—Construction subcontractors and suppliers in Kansas have won important payment protections on public work financed through public-private partnerships.
On April 7, Kansas Gov. Sam Brownback (R) signed SB55, which requires a contractor with a prime contract exceeding $100,000 on a public-private partnership, also known as P3 project, to provide performance and payment bonds. A performance bond states that the contractor will furnish and install whatever it has contracted to build in accordance with the contract plan and specifications. A payment bond states that those that supply labor and materials on a project will be paid subject to any restrictions and limitations imposed by statute, the contract or subcontract, and/or the bond itself.
Initiated by the American Subcontractors Association-Greater Kansas City chapter, the new Kansas law requires that the payment bond must be for “the full contract amount solely for the protection of claimants supplying labor or materials to the contractor or subcontractors in the performance of the work.” Such bonds must be underwritten by “good and sufficient sureties as determined by the public owner.”
“This new law is extremely important for construction subcontractors and suppliers,” said KCASA immediate past president and current KCASA Board member Sheila Ohrenberg, Sorella Group, Inc., Lenexa, Kan. “Lack of payment protections shifts substantial risks to the subcontractors and suppliers. Typically, they will extend large amounts of credit before submitting an invoice to the project’s prime contractor. They have paid workers, suppliers and estimated taxes before knowing if payment is forthcoming. Such increased risk cannot be accepted without a cost by the business owner. This cost is ultimately borne by the taxpayer. If the risk is deemed too great the most skilled and successful subcontractors may forgo participation especially if less risky opportunities exist.”
Construction of projects for public use through a public-private partnership is increasing at all levels of government, but especially at state and local levels. Governments are turning to P3s to be able to tap private-sector equity to finance capital projects rather than trying to budget public funds raised through taxes. Typically, the public entity will authorize the private entity to design, build and frequently operate the resulting public work. Private capital is attracted to such projects through financing arrangements that will provide profits to the private partner’s investors.
Depending on how a construction project funded by both public and private sources is structured, the project may be exempt from both payment bond requirements and mechanic’s lien laws, leaving subcontractors and suppliers without adequate payment assurances.
“This [new law] is good news for Kansas,” added Brad Miller, Midwest Crane & Rigging, Olathe, Kan. A past president and current KCASA Board member, Miller has been elected to serve on the national ASA Board of Directors. His three-year term will begin on July 1. “KCASA and ASA are committed to staying on top of issues that might jeopardize the construction industry.”
“Construction subcontractors and suppliers have a big stake in such legislation—making sure projects financed through P3s include payment rights,” said E. Colette Nelson, Chief Advocacy Officer, American Subcontractors Association, Alexandria, Va. “Unless specified in an authorizing statute or in the contract documents, there are unlikely to be subcontractor payment assurances—neither payment bonds nor mechanic’s lien rights—on such projects.”
“Construction subcontractors and suppliers considering work on projects financed through P3 arrangements need to confirm what, if any, payment assurances are available to them before they bid,” Nelson added.
Both Ohrenberg and Miller, along with KCASA Board member Nathan Buhrmester, Haas Wilkerson, Inc., Fairway, Kan., serve on KCASA’s Legislative Committee. They testified on Feb. 7 in support of SB 55 before the Senate Commerce Committee. As a surety account executive, Buhrmester was instrumental during his testimony, because he explained the bonding costs to a project. His knowledge of, and ability to explain, the bonding costs and process to the Senate and House members made it easy for them to understand subcontractors’ need for payment protections.
“The lack of this protection/guarantee [on public-private partnership projects] for subcontractors leaves them vulnerable to non-payment or slow payment, which can have an extreme adverse effect on their ability to perform on this and other projects, creating a domino effect on other projects and on their internal operations, threatening their ability to pay their employees and pursue other work,” Buhrmester testified. “Additionally, without this guarantee, many smaller subcontractors may forgo pursuing this work or surcharging their bid to account for the added risk. This could result in fewer and less qualified subcontractors bidding the project and at a higher cost.”
Buhrmester continued, “Coincidentally, cost is one of the main objections some opponents will likely bring up. The cost of payment and performance bonds are based on the contract price, and those rates are tiered. That is, while a $500,000 contract may come at a cost of 1.5 percent of the contract price, the next tier starts at $2.5 million with a lower cost, say 1 percent, and continues to decrease. The lowest tier is anything over $7.5 million and that cost could be as low as 0.2 percent of the contract price. Because most of the P3 projects are hundreds of millions or billions of dollars, this requirement could add as little as 0.5 percent to the cost of the project. However, if it is not required, smaller subcontractors and suppliers could add much more to their bids—5 percent to 15 percent—to account for the additional risk, as stated above. So I would purport that requiring these bonds will actually help to keep costs down, as well as ensure the most qualified contractors are performing the work.”
ASA–Greater Kansas City represents all construction subcontractors, specialty trade contractors, and suppliers. KCASA assists members to operate their businesses more profitably and equitably by offering educational programs, industry liaisons, government advocacy, networking opportunities, and member benefit programs for the purchase of goods and services.
Founded in 1966, the American Subcontractors Association, Alexandria, Va., amplifies the voice of, and leads, trade contractors to improve the business environment for the construction industry and to serve as a steward for the community. The ideals and beliefs of ASA are ethical and equitable business practices, quality construction, a safe and healthy work environment, and integrity and membership diversity.
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