Many Americans who own stock in a publicly traded company probably have never held the paper stock certificate representing their ownership. Of course, that wasn’t always the case. Forty years ago, the New York Stock Exchange (NYSE) handled between 10 million and 12 million paper shares a day, according to the Depository Trust & Clearing Corp. The exchange closed on Wednesdays and shortened trading hours on other days just to keep up. It took up to five days for trades to settle.
With more and more trades each day, a paperwork crisis developed. The securities industry, with the government’s support, devised a two-pronged solution. First, they consolidated all the paper stock certificates in a central location, or depository, so transactions could be accounted for without certificates actually changing hands. Second, they developed an electronic clearinghouse so trades could occur faster and more efficiently.
Nearly a half-century later, the Depository Trust Company and National Securities Clearing Corporation serve as the backbone of stock exchanges in the United States. Few shareholders actually hold paper stock certificates, depending instead on these trusted intermediaries to assure the rights to the stocks they hold are honored and upheld.
Today, the surety industry faces a similar challenge. Though the industry issues approximately 5 million paper bonds a year, it’s not the paperwork or a green initiative that’s driving change, but rather the developing trend of electronic procurement.
Many project owners or obligees (those to whom the bond is issued) insist contracts be bid electronically to reduce administrative costs and errors. For example, many state departments of transportation (DOTs) estimate awards to second or third bidders cost millions of dollars in the course of a year—money that otherwise could be spent on projects. For those with large-scale construction programs, the case for eProcurement is quite compelling.
With eProcurement comes the demand for eBonding. Owners that obtain their bids electronically want a bid bond (and potentially final bond) to be provided electronically, too. With different methodologies emerging and eBonding in use by more than 35 states, the need for standards is clear. Like the stock exchanges 40 years ago, the surety industry is leading a multi-pronged approach toward electronic bonding in the 21st century.
Standards for eProcurement and eBonding
In 2004, a coalition of organizations involved in the procurement and bonding processes of public projects established a set of common principles to address the use and impact of electronic methodologies. Associated Builders and Contractors, Associated General Contractors of America, American Road & Transportation Builders Association, American Subcontractors Association, Construction Management Association of America, The Surety & Fidelity Association of America (SFAA) and National Association of Surety Bond Producers developed a document to assist public owners in implementing electronic procurement.
The stakeholders acknowledge that the advent of eProcurement and eBonding offers unprecedented opportunities to reduce processing costs, enhance transparency and increase efficiency for all parties. Such electronic methodologies, however, must be open, interoperable and have adequate security and privacy safeguards to preserve the integrity of a competitive procurement environment. At a minimum, electronic procurement/bond processes should reduce confusion and allow access to all qualified bidders.
Further, processes should not affect the legal rights and responsibilities of any party: owners, construction managers, contractors, sureties or bond producers. This document serves to establish common parameters for all public owners in the electronic procurement and bonding process.
The Federal Highway Administration helped develop these guidelines and has distributed them to all 50 state DOTs. The eProcurement Bidding/Bonding Guidelines can be found online at
www.nasbp.org/www.surety.org/automation/eprocurementguidelines.html.