If President Trump can get Congress to sign off on his $1.5 trillion plan to rebuild America’s highways, airports and railroads, there’s the potential for a lot more work for those in the construction business.
Unfortunately, there’s also the potential for subcontractors and suppliers to end up on public projects where the general contractor, for one reason or another, fails to pay.
On private projects, subs and suppliers can file a mechanic’s lien when they don’t get paid. That course of action isn’t allowed on public projects. Payment bonds, meanwhile, aren’t always required on privately-funded public works, including the sort of road projects President Trump would like to see.
Without those payment protections, subs and suppliers are essentially taking on more risk than they would otherwise.
They’ve potentially extended large amounts of credit before submitting an invoice to the project’s prime contractor. Also, they may have paid workers and other suppliers and even made their estimated tax payments before knowing if payment is forthcoming for completed work.
There’s a cost to all of that that is ultimately borne by the taxpayer. Subs will price risk into their bids. And if the risk is deemed too great, the most skilled and successful subcontractors and suppliers may sit out a public project, particularly if demand for their skills exists in less risky business opportunities.
Some states allow alternatives to payment bonds, including parent-company guarantees or equity partner guarantees. These guarantees, however, can be contested in court and so just don’t come close to the protection of a bond.
A payment bond, on the other hand, not only represents the assurance of getting paid, but also comes with the surety’s prequalification of the GC.
The surety, after all, only provides a bond to contractors that it believes have the capacity to perform the work. They also examine the contractor’s character, ability to work in the region where the project is located, current work in progress and overall management as well as its financial health and record of paying its obligations.
All of this suggests one point above all others: the best way to provide payment assurances for construction subcontractors and suppliers on privately funded public projects is to adopt laws that require the GC to bond the job in the same way they would were it a taxpayer-funded public project.
Not incidentally, just because a GC is big doesn’t mean they’re necessarily strong.
Plenty of well-established and well-regarded large heavy construction companies have filed for bankruptcy over the years, including names like Modern Continental, the company on Boston’s Big Dig highway project, which was completed only because of the surety bonds issued.
California, Florida, Illinois, Maryland and North Carolina, among other states, have taken the steps to require surety bonds on privately financed projects on public land. It’s now Colorado’s turn.
Tom Patton is a Surety Advisor with CCIG. He also is on the board of directors of the Rocky Mountain Surety Association. Reach him at TomP@thinkccig.com or 720-330-7922.
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