HOW DO INCREASED PERFORMANCE AND PAYMENT BOND THRESHOLDS IMPACT YOU??

On April 6, 2011, Virginia Governor McConnell signed into law H.B. 1951 Public Procurement Act which increases the bond threshold from $100,000 for non-transportation related construction contracts to $500,000. Transportation related contracts remain at the current $250,000 level. This is the highest threshold in the country and as you know the Federal Government’s threshold is $150,000.The Governor believes this new law will help small contractors obtain work within the Commonwealth, however, the change also produces some unintended consequences of which you should be aware.

No Payment Protection

Since a mechanics lien cannot be placed on public contracts, the use of payment bonds has been the standard protection for subcontractors and suppliers. With the new regulation, you as a subcontractor do not have any payment protection on a public non- transportation contract of $500,000 or less.

Prequalification Changes

The regulation suggests a new prequalification process in lieu of a bid bond for contracts in excess of $100,000 and under $500,000. When you, as a sub, take a job that is bonded, a third party is offering assurances to the owner and all parties involved that the general contractor is capable of prosecuting the contract. This is because the surety has performed a rigorous prequalification process from both the financial and operational perspectives. In addition, sureties maintain long-term relationships with a contractor which affords them an understanding of their client’s performance capabilities over a period of time on both public and private work. The new regulation imposes the prequalification process on to the public contracting authority.

This impacts you in at least two ways. First, will the new publicly managed process be as effective as the corporate surety regimen? Is the general contractor truly qualified to perform the work and pay the bills? Second, if you bid as a prime subcontractor, be prepared to participate in the state’s prequalification process which will probably include providing financial statements to them.

Taxpayer’s Risk

Historically, bid, performance and payment bonds have been the utilized for over eighty years by governmental bodies to transfer the risk of non performance from the taxpayer to the surety. Without the surety, the risk of default falls back to you, as a taxpayer, if your business or you reside in Virginia.

During the 2011 legislative session, the Senate reviewed S.B. 1126 which suggested increasing the threshold on transportation contracts from its current $250,000 level. This bill created a panel of interested parties to study the performance and payment requirements and report its findings to the Senate in December of this year.

Please watch for further developments.

Written by: Lynne W. Cook, Senior Vice President

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