Contract Surety Bonds Protect Infrastructure Investment

The decision to rebuild and expand the City of Harrisburg’s large trash incinerator plant in the early 2000s and the financial aftermath that followed were well documented in the news media. The project was supposed to cost about $125 million dollars, but the city decided to move forward with the project without requiring their contractor to provide performance bonds guaranteeing their work.  The contractors were not able to complete the work, resulting in financial damage to the city including (but not limited to) higher property taxes for residents, laying off of city staff and higher waste bills.

Unfortunately, the project wound up leaving the city with $280 million in debt and a grand jury investigation that concluded that the lack of performance bonds was the largest factor in the city’s debt, and had they been in place, the city could have avoided much, if not all, of their financial fallout.

Most agree – there is definitely a need to repair or replace a lot of the aging and inadequate infrastructure across the United States. This includes roads and highways, dams and bridges, drinking and waste water facilities, ports and airports and more. However, local and state governments can face serious losses on projects if they do not establish surety protection. Such a problem was the subject of a recent article in Surety Bond Quarterly, a publication from the National Association of Surety Bond Producers (NASBP), which presented the case of Harrisburg, PA as one of several examples.

Contract bonds are, according to the NASBP, “surety bonds that are written for construction projects.” Typically, a project owner, known as the obligee, in this case it should have been the City of Harrisburg, seeks a contractor, known as the principal, to fulfill a contract. The contractor then obtains a surety bond from a surety bond company, through a surety bond producer such as Rose & Kiernan, Inc. Then, if a contractor defaults, which happened in the Harrisburg example, the surety company is then obligated to find a different contractor to complete the contract or pay the project owner for any financial losses incurred.

At this time, all construction contracts with the federal government over $150,000 require surety bonds for bids or as a condition of contract award. And, according to the NASBP, most state and municipal governments now have a similar requirement. But even when infrastructure projects are not solely funded by public funds, there should be some type of surety bond requirements. We’ve seen too many cases where bonding has been “ignored or reduced on public-private partnership infrastructure projects” which comes at the expense of the public. Ontario Canada has recently passed legislation for mandatory bonding after a study shown the economic value of surety bond protection. They too concur that construction projects carried out under the protection of bonded contracts have reduced risk of contractor insolvency, benefits suppliers, and is a greater management of economic risk.

For more information on surety and how R&K’s expertise will help to meet all of your domestic and international bonding needs, please see the Surety section of our website.

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