Ohio County Attempts to Waive Performance and Payment Bonds
The County Council of Cuyahoga County, Ohio has recently introduced Ordinance 2013-0018 to amend the County code. This ordinance appears to repeal performance and payment bonds as required by the County code and allows the Director of Public Works, with the approval of the Director of Law, discretion when applying bonds on a contract-by-contract basis.
In August, the County Council’s Committee on Public Works, Procurement, and Contracting conducted two hearings concerning the proposed ordinance. The surety industry was well represented at both hearings, which included company representatives, bond producers, and subcontractors all offering statements in opposition to the proposed ordinance. NASBP Member, Lou Colagrossi of Dawson Companies, testified on the protection offered to the County by the performance bond and offered the Harrisburg, Pennsylvania Incinerator as an example of a government body bankrupted by a single project performed without the protection of a surety bond. He iterated that the only product that would fully protect the County was the performance and payment bond. Other arguments in favor of bonding requirements emphasized the pre-qualification offered and the ability to transfer risk to a private third party.
The majority of testimony given in support of the proposed ordinance was made by Cuyahoga County’s Director of Law, Majeed Makhlouf. The Director provided the following reasons for supporting the ordinance:
More “critical” government contracts, such as information technology (IT) contracts, were handled without the protection of performance bonds, thus making the application of performance bonds to construction contracts mostly “arbitrary”;
Performance bonds create unnecessary “barriers” to small and emerging contractors;
The County could utilize a surety alternative such as Subguard®;
The Department of Law’s newly formed Risk Management Division is capable of performing a risk analysis in contract negotiations without third-party support from the surety industry; and
The County could bond critical portions of the construction project instead of the entire project, thus saving taxpayer dollars.
Committee Vice Chair, Chuck Germana, an independent insurance agent, raised many valid points regarding the use and purpose of performance and payment bonds. He indicated he was not sure if the risk of contractor default was something the County was capable of withstanding on its own without a surety company’s backing.
At both hearings, Committee Chair, Pernel Jones, Jr., allowed opponents an opportunity to rebut Mr. Makhlouf’s testimony. Among those counterpoints offered by the surety industry were the County would not have the ability to bear the full cost of the risk analysis now performed by the sureties and that the County would not have the specialized expertise to perform this task.
On August 27th, NASBP sent the following letter to members of Cuyahoga County’s Committee on Public Works, Procurement and Contracting expressing NASBP concerns with the proposed ordinance.
Chair Jones commented that the hearings have been a productive discussion, but he would like to keep the bill in committee until the next meeting scheduled for September 4, 2013.
