Wednesday, June 6, 2012

Are Indiana’s Proposed Bond Premium Cost Savings Real?

The American Subcontractors Association is disputing the concept that reducing the amount of payment and performance bonding on public private projects under Indiana’s recently enacted law governing public private agreements will actually reduce the overall costs of the Louisiana Southern Indiana Ohio River Bridges construction project. In a letter to IDOT and the Indiana Finance Authority, the trade association of construction subcontractors and material suppliers strongly objects to the RFQ for the East End Crossing phase of the project, which calls for payment bonding at only 5% of the bid price, and performance bonding at 25% of the bid price.

ASA’s letter points out that shifting 95% of the risk of nonpayment of subs and suppliers from the bonding company to the subs and suppliers themselves may result in a lower bond premium, but won’t produce any equal reduction in project cost. “You are asking these prospective subcontractors and suppliers to accept substantial risk on the basis of a selection process in which they were simply observers,” the letter says. “The prudent subcontractor or supplier, which the IFA and IDOT want to participate in this project, needs to respond to the risk currently being proposed to be transferred to its firm and employees. The current inadquate protections for ultimate payment of a subcontractor or supplier working on the East End Crossing Project will not come free of dollar costs to the overall project.”

In other words, subs and suppliers will increase their bids by an aggregate amount greter than the reduction in payment bond premiums the state expects to realize from reducing payment bond coverage 95% on the job. Indiana’s legislature needs to revise its economic model of public construction projets to take these realities into consideration.

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