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What's New: Government Affairs

Amended PPP Bill Clears North Carolina Senate

Tuesday, July 30, 2013  

The North Carolina Senate passed an amended version of HB 857 last night.  This legislation is intended to create uniform standards for the design-build and public-private partnership (PPP) delivery methods of public works projects to state and local government contracting entities.  The House passed the legislation on May 15.  The Senate’s action on the bill came as the legislature is close to adjournment.  The bonding provisions in HB 857 were not amended in the Senate.  A few amendments unrelated to bonding were made in the Senate and the bill now goes back to the House for concurrence.  It is expected that the bill will make it to the Governor’s desk this session.

As previously passed in the House, HB 857 would permit the State and all local government units to use the design-build and PPP methods for public works projects.  The bill would require that the design-builder to provide a performance and payment bond in compliance with the State’s Little Miller Act.  Regarding PPPs, the bill would require a payment bond from a surety company authorized to do business in the State.  The bond would have to be in the amount of 100% of the total anticipated amount of the construction contracts to be entered into under the development contract.  The payment bond would be conditioned on the prompt payment for all labor or materials for which the private developer or its contractors or their subcontractors are liable, and the bond would be for the sole protection of persons furnishing such labor or materials.  The bill contains the procedures for filing payment bond claims and would provide a payment bond form.  The bill also permits a performance bond to be required under the development contract.

As originally introduced, HB 857 would have required a 125% payment bond. SFAA worked with the AIA to reduce the bond amount to 100% before the bill passed the House.  Ideally, SFAA would have preferred the bonding provisions for PPPs to be identical to the bonding provisions for design build projects in this legislation such that payment and performance bonds in compliance with the Little Miller act would be required.  Since both are methods to deliver a public works construction project, it would make sense that the bonding requirements would be the same.

The local contractors’ groups, however, believed that a different bonding provision was needed for PPPs in which the bond amount is based on the total anticipated costs at the time the bond is obtained.  The Little Miller Act would require bonding of 100% of the contract price.  They were concerned about a much higher bond amount than necessary if the cost of the development contract was used for the bond amount.  The development contract frequently contains more cost items than construction.  This recently was a problem for a large North Carolina contractor.  The bill also defines "contractor” as anyone employed by the developer to provide labor, material or services for the design and construction the project.  It is expected that there likely will be more than one construction contract and that some of the construction contracts will not be entered into until after the development contract is executed.  It could be difficult, if not impossible in some situations, to bond the exact cost of the construction contracts at the time of entering into the development contract, which contains the bonding requirements.  The contractors’ groups were more comfortable with requiring the payment bond to be in the amount of the total anticipated cost of the construction contracts and requiring the developer to certify that amount as a good faith projection.  While there could be some inaccuracy, there also are incentives for the developer to certify the most accurate amount.  The developer does not want an unnecessarily high bond amount because the premiums increase.  If the developer certifies an amount that is lower than the actual costs, the public owner can take steps to address that, particularly if the contractor is perceived to be in a weaker financial position.

The bill was developed as a consensus bill with 14 different local entities.  All the local contractor, architect and engineering groups support HB 857.  The Municipal League and the Associations of County Commissioners support this bill as it will pre-empt a large number of bills for these delivery for individual counties and bills for one or a few specific public works projects methods.  SFAA understands that the unique bonding provision for PPPs in HB 857 resulted from an effort aimed at getting the bonding requirements right for PPPs in North Carolina.

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