There are nine questions contractors should ask about public-private partnerships (P3s) before signing the contract.
1. Why are P3s such a big issue in the United States now?
Currently, the need for infrastructure improvement in the United States far exceeds the available funds at the state and federal level. The financing that the private partner brings to the table through a P3 is attractive to public entities because needed projects can get done now.
2. How are P3s different from other public works projects?
Under traditional methods of construction of public works projects, the public entity lets a contract, based on a public design, to a private construction company that delivers a completed public works project. Under a P3, the private partner may participate in the design, finance, construction, operation and/or maintenance. The public entity selects a private partner, who in turn hires, supervises and pays the construction contractor.
3. If the private partner finances the project, is it still a public works project?
The private party merely finances the project. The public still ultimately bears the cost and obtains the benefits of the project. The private partner is repaid with a stream of public revenues, plus a profit, over a long period of time. The end result of a P3 is a project that provides a public service or facility.
4. If P3s are allowed in a contractor’s State, won’t the large national contractors get all the contracts?
That is not necessarily that case, but on very large projects local contractors that have been general contractors may become subcontractors, and as such, they need to be concerned about the P3 agreement they are working under. The P3 laws vary greatly among the states, and all the usual procurements laws the local contractors are familiar with may not be applicable.
5. How are the rules for P3s different?
Subcontractors and suppliers on P3s should assess the security required from the private partner to secure its obligations to assure that surety bonds are in place. Some state P3 laws are silent on the security required, and a few states allow alternative forms of security, such as parent company or equity partner guarantees. To the extent that the security required makes it difficult or impossible for subcontractors and suppliers to pursue payment claims, their risk of nonpayment substantially increases on the P3 project. Surety bonds are the most effective and efficient way to provide payment security for subcontractors and supplier. Claims can be made on the payment bond for work performed.
6. Because a private partner is involved, will the subcontractor have lien rights if the contractor defaults?
Don’t count on that. Mechanic’s lien laws do not apply to construction on public land, and to date, state or local governments most often own the land on which P3 projects have been built.
7. Doesn’t the public entity carefully scrutinize the private partner selected?
The public entity is prequalifying the private partner for all the phases of a P3 project, and construction is simply one part of those contractual responsibilities. However, the surety reviews the construction contractor with a broader scope, rather the just the contractor’s qualification to complete the public works project upon which the contractor submits a bid. Rather, the surety reviews all the contractor’s works in progress to make a determination that the financing, equipment, workers and other resources will be available and on location when the new project starts. The performance bonds in place on traditional procurements provide further assurance to subcontractors and suppliers that the general contractor has been prequalified. Those bonds are just as valuable on a P3.
8. Aren’t the private partners large companies that are unlikely to fail?
Large contractors need the surety’s prequalification in a P3 just as in any other public works project. Big is big; it does not necessarily mean strong. One only need look back less than 20 years to see a list of well-established and well-respected large heavy construction companies that have filed for bankruptcy. Construction is a risky business, and contractors perform more than one project at a time. It is not uncommon that the loss that causes the collapse of a company is not the job the contractor is performing for a particular public entity, but rather one of its other projects.
9. What can contractors, subcontractors and suppliers do locally to protect themselves on a P3?
The growing interest in and use of P3s in the United States will provide opportunities to change existing P3 laws that are silent on bonding or that permit alternatives to bonds. As states without authority to use P3s consider enacting a P3 law, local contractors should assure that bonding is required in the P3 agreement that the public entity signs. A P3 is just a new method to deliver a construction project. The design and construction portion of the P3 should be bonded like any other public works project.