Infrastructure is the backbone of a healthy economy. It enables trade, powers businesses, connects workers to their jobs and gives more than 325 million people in the United States the means necessary to live and work in their communities. The need for modern, efficient and reliable infrastructure is at its all-time high; however, the cost of infrastructure improvements in our country far exceed the available funds at the state and federal level.

Due to the lack of funding, many public entities are considering public-private partnerships, also known as P3s, as a way to finance and complete necessary infrastructure projects.

Unlike traditional methods of construction for public works projects, P3s allow private partners to participate in the design, financing, construction, operation and maintenance of a project. The public entity signs a contract with a private partner, committing public funds to repay the private partner, plus a profit, over a period of time ranging 30 to 99 years. The private partner chooses and pays the construction contractor and oversees the construction project.

P3s are transforming the way public infrastructure projects are being completed; however, a critical aspect is often overlooked—the need for surety bonding protection. Rebuilding the nation’s infrastructure is essential, but doing it without the protection of a surety bond should not be an option.

Risky Business

Although procurement methods have evolved—including the increased use of P3s—construction risks remain the same. Contractors can run into financial difficulty on public projects for a number a reasons, particularly during uncertain economic times.

Over 100 years ago, the U.S. adopted a policy requiring surety bonds on all public works projects. These bonds guarantee that funds will be available to complete the project and pay the subcontractors, suppliers and workers on the job even if the contractor defaults. But what happens if a surety bond is not in place? Multiple stakeholders are at great risk.

At this time, bond requirements for P3s vary from state to state, and thus the extent of protection varies greatly. Without a surety bond in place, taxpayers bear the burden of paying any excess completion costs should a contractor default. Subcontractors, suppliers and workers can be left unpaid and cannot lien public property for payment. Public officials are left to handle angry constituents, unemployed and unpaid workers, and a tarnished reputation for not completing projects they had promised.

Surety Bonds Empower Contractors

In addition to the completion and payment protection surety bonds provide for infrastructure projects, another primary benefit of bonding is the surety’s prequalification of contractors. Sureties perform a robust review of a contractor and their projects as part of their underwriting of the contractor. The surety provides a bond only to contractors that are financially capable of performing the work. The surety examines the contractor’s experience in the type of work to be performed, ability to work in the region where the project is located, current work in progress and overall management, as well as its capital and record of paying its obligations. This broad view by the surety ensures better diligence in vetting project bidders.

With surety bonds backing their projects, public agencies can be assured their projects will be completed, mitigating the financial risk to the stakeholders involved. Experienced sureties can also help private entities resolve issues before and during the term of a P3 project.

Surety bonds empower contractors. Contractors have access to more work when they are backed by surety bonds than by soley relying on their own balance sheet. This significantly benefits small, emerging, disadvantaged and minority contractors.

Modernizing TIFIA

Bonding protects taxpayer dollars, ensures project completion, supports economic growth, and protects local small business subcontractors and suppliers. Along with several construction industry stakeholders, the surety industry is advocating for federal laws, such as the Transportation Infrastructure Finance and Innovation Act (TIFIA), to be modernized, requiring P3s to follow the same payment and performance security requirements as all traditional (non-P3), federally funded construction delivery methods.

While P3s provide a mechanism for greater private-sector participation in all phases of the development, operation and financing of transportation projects, a proposed amendment is needed to clarify that performance and payment security is required to protect the public interest, regardless of the construction delivery method.

Through their bipartisan bill, Promoting Infrastructure by Protecting Our Subcontractors and Taxpayers Act, Reps. Stephen Lynch, D-Mass., and Troy Balderson, R-Ohio, are seeking to ensure these critical bond protections are included on TIFIA-financed projects as they would be for any other federally funded project.

Securing the Future

The recent pandemic-induced financial downturn has fueled a heighted interest in surety bonds for P3 projects. Public agencies and investors want to protect their investments in any economic environment. Surety bonds offer assurance that the contractor is capable of completing the contract on time, within budget, and according to specifications. Requiring bonds not only reduces the likelihood of default, but with a surety bond, the owner has the peace of mind that a sound risk transfer mechanism is in place. The burden of construction risk shifts from the owner to the surety company.

Surety bonds are a simple, yet effective way to protect the interests of public owners, investors, taxpayers, subcontractors, suppliers and workers.