Virtually all states have enacted what have become known as "Little Miller Acts," similar to the Federal Miller Act (40 U.S.C. Section 3131 et seq.). These statutes require general contractors on public works projects to provide performance and payment bonds to secure the project. Public owners have recourse against the performance bond in the event the contractor defaults on the contract, and subcontractors and suppliers have recourse against the payment bond in the event the general contractor fails to pay them amounts that are due.13
The Federal Miller Act provides some flexibility as to the penal amount of the bonds. For the performance bond, the Act provides that the bond must be in an amount the contracting officer considers adequate for the protection of the government.14 For the payment bond, it requires that the bond be in the total amount payable under the contract, unless the contracting officer makes a written determination, supported with specific findings, that a payment bond in that amount is impractical.15 This recognizes that the surety market places limits on total bonding available to each contractor, increases the pool of contractors interested in competing for the project, and permits the contracting officer to tailor the financial security requirement for larger projects based on an assessment of the agency's potential maximum exposure in the event of default, which is generally much smaller than 100 percent of the contract price.
In enacting their own parallel surety bonding provisions, many states have not included Miller Act-type flexibility regarding the amount of the bonds. In many states, the Little Miller Acts simply require that both bonds be in an amount equal to the total amount payable under the contract, which creates a potential problem for large projects.16 The statutes provide very little flexibility to address either the scale of many PPP projects or the considerable structural differences between PPPs and traditional projects.
Several considerations suggest that state and local transportation agencies ought to have greater flexibility with respect to financial security requirements in PPP projects.
• For very large projects, requiring private partners to provide surety bonds in the full amount of the contract price may have the effect of limiting the number of proposers who can compete for the project as the requirement may exceed the bonding capacity of many potential competitors.
• PPP projects typically establish a high "responsibility" threshold for the private partners, initially assessed during the procurement's short-listing process and re-assessed when final proposals are received. In order to qualify, proposers must demonstrate their financial and technical capabilities. This presents an important difference from traditional low-bid procurements, where the public sector usually considers a firm qualified if it is able to provide the required surety bonds.
• A standard requirement of PPP programs is that the private partners provide an additional layer of security in the form of parent company guarantees, whereby the parent company is liable for losses that result if the subsidiary that enters into the public-private agreement fails to perform its contract obligations.
• In the typical PPP project, the government's private partner may consist of a consortium of companies, each of which must meet the agency's qualifications standards in order to be eligible to submit a proposal. Moreover, each of them may be required to provide parent company guarantees.
• The private partners in PPPs can be required to provide other alternative forms of security, such as letters of credit upon which the government may draw in the event of a default.
• Most PPP contracts involve a wide range of services in addition to construction, often including design professional services, supply of equipment and rolling stock, and management services. As the intent of the Miller Act-type statutes is only to secure performance of construction contractors, it may be inappropriate to require surety bonds to cover the non-construction services in PPP contracts.
State PPP statutes should allow the transit agency or authority considerable flexibility to deviate from 100 percent performance and payment bond requirements applicable to other contracts for public works. Ideally, the statutes would provide a simple exemption from those requirements and authorize the agency to develop its own approach to financial security requirements that can be flexibly applied to the needs of each PPP project on a case-by-case basis. In this way, the interests of the parties, the project and the public can all be weighed and advanced.
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13 The requirements for payment bonds on public projects are generally recognized as serving as a substitute for mechanics' lien rights of subcontractors and suppliers, since publicly owned property is generally exempt from mechanics' liens under the doctrine of sovereign immunity.
14 40 U.S.C. Section 3131(b)(1)
15 40 U.S.C. Section 3131(b)(2) It should be noted that FTA's Circular on Third Party Contracting Requirements requires performance bonds for 100 percent of the contract price for projects exceeding $100,000. It also establishes minimums for payment bonds. (Circular FTA C 4200.1E, Section 11) However, FTA has granted waivers from this requirement in larger design-build and DBOM projects, including for Colorado's $1.1 billion T-Rex Project that included an extension of light rail in the I-25 corridor, and for New Jersey Transit's River LINE.
16 See, eg., Arizona - A.R.S. § 34-222; North Carolina - N.C. Gen. Stat. § 44A-26; Oregon - ORS 279C.380; Virginia - Va. Code § 2.2-4337.