2015 Offers Opportunity to Ensure States Require Bonding for P3s

The two days of conferences produced by NASBP and Smith, Currie & Hancock (SCH) in Washington, DC, on November 12 and 13 was a confection of cutting-edge construction and surety industry presentations, fascinating guest speakers, networking opportunities with a wide variety of industry stakeholders, and a reception and dinner at one of DC’s finest restaurants. See pictures from the two days of conferences below.

Bob Chambers, Managing Partner of the national construction law firm of SCH, summed up the conferences as follows:

"Both days’ seminars went extremely well, in large part due to the wide range of knowledgeable speakers, not just from Smith Currie and NASBP, but also from other industry trade associations, such as AGC and ASA, as well as government agencies and industry experts. The participation, questions, and feedback from attendees, including bond producers, surety company representatives, contractors, and CPAs, throughout both days also added a great deal to the overall exchange of information and ideas."

The attendees included bond producers; surety company representatives; construction CPAs, industry lobbyists, representatives from AGC, AIA, ASA, MAPP, and SFAA; contractors; state and federal agency representatives; and, of course, staff from NASBP and attorneys from SCH. The attendees had robust discussions, both during presentations and during informal networking breaks.

The first day’s conference focused on up-to-date federal construction issues that all industry stakeholders need to understand in order to assess and manage their risks in the changing federal contracting arena: best value procedures, bid mistakes, small business programs, joint ventures, teaming and mentor-protégé arrangements, false claims act issues, and risk-shifting provisions. A few of the takeaways from the presentations are discussed below.

With regard to best value contracting and competitive negotiation, where a contract award is made on a variety of factors (not just price), contracting officers are vested with a great deal of discretion and can make subjective judgments. As a result, overturning contract awards made under such procedures can be very daunting. As one presenter stated, if a contracting agency can articulate a reason for its selection decision, then “put a fork in it; you are done.”

Bob Chambers discussed bid mistakes. He remarked that clerical mistakes, such as a clear mathematical error, can be corrected but that a materially defective bid, such as one that omits an essential element of the solicitation, cannot be corrected. The contracting officer or his or her administrative designee has discretion to go one way or the other, and it is almost a given that you will be stuck with that decision. Chambers discussed several cases where the bid bond was rejected as nonresponsive.

Steve Reed, a SCH partner, opined that you can’t successfully perform government contracts without knowing the applicable laws and regulations; he thereafter noted that the FAR is about 2,000 pages. He observed that claims arising under the False Claims Act (FCA) comprise a growth industry and that the federal government reaps significant revenue from prevailing on such claims. He also noted that the imposition of FCA allegations in federal construction contract disputes is becoming the norm rather than the exception. These particular comments caused the audience to sit up straighter and pay even more attention to his remarks.

Reed noted that, with regard to joint ventures, the goal for small businesses is to get as much assistance as possible without crossing the line into affiliation under 13 C.F.R. § 121.103, which would cause the business to lose its small business size status. Generally speaking, under federal affiliation rules, affiliation exists when one business controls or has the power to control another business or when a third party controls or has the power to control both businesses. Control may arise through ownership, management or other relationships or through interactions between parties. Affiliation is always an issue to be considered in joint ventures with small businesses. An agency determines affiliation through a variety of objectives factors, but ultimately the decision is subjective and based on a totality of circumstances. For instance, there is case law that bonding assistance alone cannot give rise to a finding of affiliation; but what happens when the assistance gives rise to an indemnity obligation and the desire for the larger contractor to control the project and, therefore, the performance of the small business?

The luncheon guest speaker was Ann Marie Mehlum, Associate Administrator of the Office of Capital Access at the U.S. Small Business Administration (SBA). She updated attendees on the various initiatives occurring at the SBA and was joined at the podium for a lively Q&A by Frank Lalumiere, Director of the SBA’s Office of Surety Guarantees. Mehlum discussed the importance of the SBA’s partnership with the surety industry and how the SBA is making efforts to align its regulatory practices with prevailing industry customs and practices and to streamline program administrative processes for more efficiency.

On Wednesday evening, attendees enjoyed themselves at a reception and dinner sponsored by International Fidelity Insurance Company, held at D.C. Coast, one of Washington’s premier restaurants.

Thursday’s conference focused entirely on Public-Private Partnerships (P3s), with presentations on how P3s differ from other project delivery methods, federal P3 initiatives, and where risks lie on P3 projects, and P3 case studies. In the afternoon a robust panel discussion occurred on the role of the surety product in the P3 marketplace. A few of the day’s presentations are discussed below.

SCH Partner Ernie Brown opened the day’s session with a comprehensive--and understandable--discussion of P3 structures. Jimmy Christianson of AGC and Shoshana Lew, Deputy Assistant Secretary for Transportation, presented on federal P3 initiatives: TIFIA, WIFIA, and direct federal P3 projects.

The guest luncheon speaker was Chris Matthews, Project Manager at Arcadis LLC, who discussed the newly released EJCDC Public-Private Partnership Agreement, on which he worked, and spiced the presentation with his own stories from decades of experience on P3 projects.

The P3 Conference ended on a lively note with a panel presentation on the role of the surety product in managing risks on P3 projects. The experienced panel was comprised of representatives from two surety companies, a construction firm, and Standard & Poor’s Ratings Services (S&P). One speaker observed that P3 projects are not construction projects; rather, they are financing projects with a construction component. An financial rating agency, such as S&P, will assign the rating, which will determine the cost of financing; the lower the rating, the more competitive the concessionaire will be. Lenders for such projects begin to be paid back at the point of time after construction ends and the concession begins, and any delay will impact that date when the lender starts getting paid back. For rating agencies and lenders, the goal is to minimize the risk of delay in commencement of the concession term. 

So the big question is how can the surety product address rating issues? Jatinder Mall, Director, Utilities & Infrastructure at S&P, observed that, any delay in processing a claim is of concern. The rating agencies are looking for a clear and expeditious adjudication of claims, by which there is a timely response, with quick access to funds so that the construction proceeds in accordance with the contract documents.

The panelists noted generally that the surety product will evolve to respond to the needs of the P3 marketplace. Some sureties have already created hybrid products with more “liquidity.”  Surety bonds on P3 projects are of significant interest for sureties, and there will certainly be a continuing robust dialogue into the future.

NASBP First Vice President Susan Hecker summed up the P3 Conference as follows:

"Our country’s infrastructure needs and its lack of public capital are converging to make P3s a necessity of the future. The NASBP-Smith Currie P3 Conference brought together industry professionals from the disciplines of construction, surety, law, government, and a key credit rating agency to educate and work through the challenges that P3s bring.  Securing the requirement for performance and payment bonds for at least the construction portion of all P3 projects is a top priority of our industry. Not only was the conference a wealth of information for all of the conference attendees, but also the discussion was advanced to work through those issues further than many industry professionals on the forefront of the debate have seen to date." 

From left, Mary Alice McNamara of Travelers, Bob Chambers of Smith, Currie & Hancock, Susan Hecker of Arthur J. Gallagher, and Ernest Brown of Smith, Currie & Hancock.

Pictured above are the panelists of the panel titled, "What is the Role of the Surety Product? Panel Discussion In the P3 Marketplace?" from left, Mike McKibben of Zurich, Mary Alice McNamara of Travelers, Bill Ernstrom of Walsh Construction, and Jatinder Mall of Standard & Poor’s.

Pictured above, from left, are CEO Mark McCallum of NASBP, Ann Marie Mehlum of SBA and Frank Lalumiere also of the SBA.

Pictured above are the panelists of the panel titled, "P3 Case Studies: Lessons Learned from Panel Discussion The Trenches," from left, Sara Henningsgaard of Roy Jorgensen Associates, Colette Nelson of the American Subcontractors Association, Moderator Ernest C. Brown of SMC, Keith W. Newell of HUB International, and Sam Beydoun of the Virginia Office of Public-Private Partnerships.