Public-Private Partnerships (P3s): What Subcontractors Need to Know
Because of the aging infrastructure in the United States, we are seeing the growth of public-private partnerships (P3s) as a use of alternative contractual arrangements. This is largely due to budgetary constraints facing many local and state governments. P3s bring private partner funding to the table that can help get needed projects done sooner. The public agency is still paying for the project, but they are able to leverage private funds (either through grants or loans) not usually available through typical public procurements. The result of a P3 project is something that provides a public service or facility.
According to Surety Bond Quarterly, a publication from the National Association of Surety Bond Producers (NASBP), the most common types of P3 procurements in the U.S. are roads and light rail, however, this model is also being used for assets such as airports, educational buildings, public administration buildings, sports and entertainment facilities and utilities. The increase in P3 projects provides increased opportunity for subcontractors, along with new risks, so there are a few things that you need to know.
First, bond requirements vary from state to state.
Not all states and local agencies have the authority to enter into a P3. Below is a map of P3 state laws as of January 2020 from the Design-Build Institute of America (DBIA). When it comes to P3 projects, however, it can be a bit unclear as to whether or not a state’s Little Miller Act applies to a specific project. Why? In a P3, the contractor is not entering into a contract with the public entity but the private developer who in turn has a project agreement with the public owner.
Second, carefully review a subcontract and consult counsel with any questions.
To date, according to the NASBP, P3 projects have been large and complex with rigorous requirements for contractors and developers. This means that a lot of these terms are passed down to the subcontractor. They recommend that subcontractors “take extra care” when review a subcontract and related terms that are part of P3 project.
Third, understand payment protection available on a specific project.
Know the rules that dictate when you get paid. Prompt payment acts are common across the U.S. but they vary from state to state. P3s are public projects. As a subcontractor, learn whether or not a state’s Little Miller Act applies to P3 projects or if the state has other bond requirements for P3s. If a state does not have legislation or if requirements are unclear, we advise the subcontractor to obtain and review the general contractor’s payment bond. It is very important to make sure that you have a high penalty payment bond in place that is equal to at least 50% of the contract price.
Surety professionals at Rose & Kiernan, Inc. along with organizations such as the NASBP and the Surety & Fidelity Association of America (SFAA) are good resources to reach out to help understand legislation and surety bonding requirements for the construction portion of P3s.
If you have any more questions on this topic, you can contact us here or give us a call at (800) 242-4433. 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.