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1 PERFORMANCE B OND COST EFFECTIVENESS ANALYSIS By LORENA MYERS A THESIS PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ENGINEERING UNIV ERSITY OF FLORIDA 2009
2 2009 Lorena Myers
3 To all the engineers who provided the foundation for where we are today in the engineering field
4 ACKNOWLEDGMENTS To my advisor and Supervisory Committee Cha ir, Dr. Fazil Najafi, who stood by me through the tough moments your words of encouragement will forever be remembered Thank you for directing, supporting and encouraging me. I appreciate your patience when helping me correct the many mistakes I made alo ng my journey in the learning process. To the other member in my Committee, Dr. Mang Tia, many, many thanks to you for guidance and encouragement to keep focused on what is important and for the many ways in which you have supported me. To M r. Peter K op ac, for giving me insights into the world of contracts; t he i nformation was very useful because, after communicating with you, I had a clearer understanding of what I was up against. To the DOTs, for responding to m y requests and providing the contract inform ation I needed to help get my thesis on the road. I appreciate the time you took out of your busy schedule. To Nancy McIlrath Glanville, for her patience, in keeping me on track during the times I was trying to figure out what wa s what I appreciate you r h elp and support. To Will Myers for your undying support, for being my best friend who understood what I was going through when the times got tough and for always believing in me. Finally, to those of you who help ed me in small but significant ways you provided the motivation I needed to keep on going Thank you.
5 TABLE OF CONTENTS page ACKNOWLEDGMENTS .................................................................................................................... 4 LIST OF TABLES ................................................................................................................................ 7 LIST OF FIGURES .............................................................................................................................. 8 ABSTRACT .......................................................................................................................................... 9 CHAPTER 1 INTRODUCTION ....................................................................................................................... 10 1.1 Background and Scope ......................................................................................................... 10 1.2 Research Hypothesis ............................................................................................................. 11 1.3 Research Objectives .............................................................................................................. 11 1.4 Research Approach ............................................................................................................... 12 2 LITERATURE REVIEW ........................................................................................................... 14 2.1 Introduction ........................................................................................................................... 14 2.2 Historical Review .................................................................................................................. 14 2.3 Current Development ............................................................................................................ 17 2.4 Current State Practices .......................................................................................................... 18 3 METHODOLOGY ...................................................................................................................... 24 3.1 Introduction ........................................................................................................................... 24 3.2 Data Collection ...................................................................................................................... 24 3.3 Data Organization ................................................................................................................. 30 4 RESULTS, ANALYSIS AND DISCUSSION .......................................................................... 34 4.1 Introduct ion ........................................................................................................................... 34 4.2 Results .................................................................................................................................... 34 4.3 Analysis ................................................................................................................................. 35 5 CONCLUSIONS AND RECOMMENDATIONS ................................................................... 43 5.1 Summary................................................................................................................................ 43 5.2 Conclusions ........................................................................................................................... 43 5.3 Recommendations ................................................................................................................. 44
6 APPENDIX A CATEGORIZING PROJECTS USING SURETY BOND PREMIUMS ............................... 46 B 30 STATES PRACTICES PERFORMANCE BONDS ........................................................ 53 REFERENCES ................................................................................................................................... 63 BIOGRAPHICAL SKETCH ............................................................................................................. 68
7 LIST OF TABLES Table page 2 1 State Bond Thresholds as reported by The Surety and Fidelity Association of America. .................................................................................................................................. 22 3 1 Performance Bond one -time premium as reported by SFAA. ............................................ 31 4 1 States total number of defaults and projects information for 07 09. .............................. 34 4 2 States Original cost of projects, Bond Premium to Suret y and total projects information for 07 09. ...................................................................................................... 36 4 3 All 7 States default contractor, type of default, cost of project and approximate percent complete of project at time of default for 2007 2009. ......................................... 37 4 4 States total number of defaulted contractors, contractors and projects. ............................. 40 4 5 States total cost of default proj ects, 50% of total cost of default projects and surety cost of all projects for 2007 2009. ...................................................................................... 40 4 6 States surety cost of default projects for 2007 2009 in relation to the total surety cos t of all projects for the same time period. ........................................................................ 41 4 7 States default projects and cost, all projects and total cost for 2007 to 2009. .................... 42 4 8 States cost of default projects as a percent of total cost of projects for 2007 to 2009. ...... 42 A 1 States original and surety cost for all projects with corresponding price range and pe rcent bond premium from 07 to 09. ................................................................................ 47
8 LIST OF FIGURES Figure page 2 1 State practices for prequalification for contract awards as reported by Mi nchin and Smith in the National Cooperative Highway Research Program (NCHRP) Quality Based Performance Rating of Contractors Prequalification and Bidding Purposes (2001). ..................................................................................................................................... 19 3 1 The Alabama Department of Transportation letter requesting contract information September 2009. ..................................................................................................................... 26 3 2 The Hawaii DOT request for information form sent September 2009. .............................. 27 3 3 The Rhode Island DOT request for information form sent September 2009. .................... 29
9 Abstract of Thesis Presented to the Graduate School of the University of Florida in Partial Fulfillm ent of the Requirements for the Degree of Master of Engineering PERFORMANCE BOND COST EFFECTIVENESS ANALYSIS By Lorena Myers December 2009 Chair : Fazil Najafi Major: Civil Engineering A performance bond provide s the assurance that an awarded construct ion project will be satisfactorily completed in the event that the contractor is unable to complete the projects as agreed and the contract is terminated Passed into law in the late 1800s, performance bonds protect against financial losses. The ability o f contractors to provide performance bonds for the projects they bid on has mistakenly b een assumed as a guarantee that contr actor s will perform well on the projects they are awarded when in fact this is not the case. With the scarcity of funding due to t he recent recession, and the awarding of contracts to contractors who continual ly default on projects they are award ed indications are that there is a need to evaluate the cost -effectiveness of p erformance bonds This paper takes a look at the cost -effect iveness of performance bonds on a national basis In order to do the analysis, state construction project data was collected for contract awards from the last two years (September 2007 to September 2009). The results of the analysis suggest that states th at have a small number of defaults or none at all did not benefit while states that have numerous defaults benefited from having performance bonds. In conclusion, the results suggest that performance bonds w ere beneficial to states that experience a larg e number of defaults.
10 CHAPTER 1 INTRODUCTION 1.1 Background and Scope U sing bonds alone does not guarantee that a contractor can perform the work. Bonds protect against financial losses but cannot predict delays and public inconveniences Research has not suggested so far that prequalification predict s delays, eliminates public inconvenience, or guarantees that contractors can perform work. The value added by a prequalifica tion (meaning performance based) system, from the prediction standpoint, is that De partments of Transportation ( DOTs ) collect performance information on contractors (1 ). In order to consider switching to using performance based prequalification, it is important to evaluate the cost effective ness of the current pr actice of performance bon ding The scope of this research is to analy ze the cost -effectiveness of performance bonds through: Obtaining contract awards data (name of contractor, type of project, cost of project and whether the contractor defaulted on the project ) from all states. For the states with defaulted projects, obtaining information about the percent complete of each project at th e time of default Obtaining performance bond premium cost for projects. Categorizing projects based on performance bond premium thresholds. Ana lyzing the type and range of projects experiencing the most default to see if there is any correlation. Calculating the possible DOTs benefits using the default information by assuming 50 percent of total defaulted projects costs is the amount the surety s pends for the completion of defaulted projects. Finding the ratio (1) of DOTs benefit to total cost of performance bond premium to surety for defaulted projects.
11 Finding the ratio (2) of total cost of all defaulted projects to the total cost of all projec ts. Analyzing ratio (2) to ratio (1) to conclude whether it is cost effective to use performance bonds. 1. 2 Research Hypothesis Performance bond s are the current practice used by all states to ensure the successful comp letion of projects. The goal is to eventually transition to a performan ce based qualification practice. To consider transitioning from performance bonds to performance based qualification, the cost effectiveness of performance bonds needs to be evaluated As was mentioned earlier, performanc e bonds come into eff ect only after defaults occur. Based on this, the research hypothesis is: u sing the state projects default information it is not cost effective to use performance bonds. 1. 3 Research Objectives The original set of objectives for th is research, came from the 2009 Transportation Research Board (TRB) National Cooperative Highway Research Program ( NCHRP ) Synthesis 390: Performance -Based Construction Contractor Prequalification suggestions for future research on Performance Bond Cost -Effectiveness Analysis http://onlinepubs.trb.org/onlinepubs/nchrp/nchrp_syn_390.pdf These objectives are as follows: Quantify the cost of performance bonding on a nati onal basis. Specifically look at contractor defaults rates on a state-by -state basis. Develop a list of contractors that have exemplary performance record. Develop a list of types of public transportation projects that are at most risk of default based on past records of contractor performance. Develop a list of types of public transportation projects that are at least risk of default based on past records of contractor performance.
12 Compare the cost of performance bonding with the potential benefit of repl acing performance bonding with a rigorous performance -based contractor prequalification process based on the Ontario Model. Develop an algorithm to adjust a good contractors performance bonding requirements in the event the a gency chooses to implement the process The original thesis title accompanying the above objectives was Performance Based Contractor Prequalification as an Alternative to Performance Bonds. Although the previously mentioned objectives involved many facets, it was a starting point from where the research could have begu n In addition, a ccording to a Federal Highway Administration (FHWA) o fficial, the study is estimated to cost $275K, or a little over 1 person-year of effort, and was thus not meant for a grad student working alone. Due to the decision to consider the cost effectiveness of performance bond through evaluating defaults, the thesis title was changed to the current one. Indeed, before an evaluation can be made to consider implementing another practice i t is important to know the cost -effectiveness of the current on e Also, given the duration of the research period, the original objectives were revised to the following: Search literature on current topic of performance bond. Collect contract awards data from September 2007 to September 2009 from all states. Obtain an estimate of surety performance bond premium cost. Perform an a nalysis of data based on defaulted and all projects. Quantify and anal yze the benefit to cost of having performance bond for defaulted and all projects (See Table 4 6 through 4 8 ). Conclude from results and analysis whether or not the hypothesis is support ed Make suggestions for future research work. 1. 4 Research Approach Performance bond coverage comes into effect when the surety has proven that the con tractor has indeed legally defaulted. With this in mind, the decision was made to analyze the
13 cost effectiveness of performance bonds using defaults since performance bonds were put in place to remedy problem s associated with defaults. The following litera ture review chapter gives some insight into the relationship between performance bonds and defaults.
14 CHAPTER 2 LITERATURE REVIEW 2.1 Introduction This c hapter reviews literature research relevant to evaluation of the cost effectiveness of performance b onds A library search at the University of Florida (UF) was done to find ar ticles on the topic of the cost effectiveness of performance bonds and is discussed in the Historical Review below An online search yielded recent articles that consider performan ce bonds but do not specifically address the cost -effective ness of performance bonds. A rticles that were obtained during the online search are discussed in both the Historical Review a nd Current Development sections below. 2.2 Historical Review The use of performance bonding arose in the American construction industry in the late nineteenth century in an attempt to protect public treasuries against the risk of default on public projects. Prior to the 1890s, most sureties were individuals and uncompensate d, although a few corporate sureties had been organized. In response to the financial panic of 1893, the Heard Act was enacted It required that the performance and payment obligations of federal contractors be guaranteed by surety bonds issued by good and sufficient sureties, including compensated corporate sureties approved by the Treasury Department ( 2 ). Congress passed the Heard Act in 1894. Before the passage of the Heard Act, a subcontractor or supplier of a government contractor had little recours e against the government contractor, since the subcontractor or supplier could not assert a lien against property owned by the United States (U.S.) Government contracts awarded during that period only rarely had clauses requiring the prime contractor to pa y its debts to subcontractors and suppliers or permitting the government to withhold payments to the contractor if it did not. The Heard Act
15 granted a right of action in the name of the U.S. against a prime contractor and its surety for unpaid labor and ma terials used in the prosecution of contract work ( 3 ). In 1905, Congress amended the Heard Act by adding the phrase labor or materials used in construction of any public building or public work. Noting these deficiencies, Congress repeale d the Heard Act (3 ). In 1935, the Miller Act replaced the Heard Act ( 2 ). The Miller Act provides as follows: bonds of contractors of public buildings or works type of bonds required before any contract for the construction, alteration or repair of any public building or public work of the U.S. is awarded to any person, such person shall furnish to the U.S. the following bonds, which shall become binding upon the award of the contract to such person, who is hereinafter designated as contractor: a performance bond with a surety or sureties satisfactory to the officer awarding such contract and in such amount as he shall deem adequate, for th e protection of the U.S. In 1966, Congress amended the Miller Act to further protect the government and required that a bond issued pursuant to this legislation specifically provide coverage for taxes imposed by the U.S. which are collected, deducted, or withheld from wages paid by the contractor in carrying out the contract with respect to which such bond is furnished (4 ). To u nderstand how performance bonds work, it is important to look at how a bond is formulated. A p erformance bond is, first and foremost, a contract ( 2 ). It is a document that creates rights and obligations that are distinctly in the nature of a contract, and which in turn incorporate other rights and obligations that are also distinctly in the nature of a contrac t. Hence, anyone setting out to understand just what a performance bond is would be well advised to appreciate early and never forget that the law of performance bonds is contract law and that the precepts of the law of contracts universally apply. In addition, because the setting is by definition
16 contractual, the next step in understanding and/or analyzing a performance bond is to read it, line by line and word by word. Apart from statutory bonds, which have their own set of immutable dictates simply because they are statutory, all others are ultimately a function of what the parties agreed to, nothing more, nothing less. Within the bounds of what is la wful, all that follows (in the contract) can be varied by specified agreement (4 ). Performance bonds are contract s that create a tripartite relationship. There is the principal (typically the general contractor) who has assumed a contractual undertaking. There is the obligee (typically the project owner and for the purposes of this research will be taken as the State Department s of Transportation (DOTs) that is due the benefits of the principals performance. And there is the surety who provides the p erformance bond that secondarily guarantees to the obligee performance of the principals contractual undertaking. As was mentioned above, performance bonds ensure that, although unfavorab le circumstances may arise, the project will be completed The suret y would pr ovide the resources to hire a new principal to complete the work specified, or the balance of funds allocated to remaining work would be returned to the obligee (2 ). Therefore, to analyze the cost effectiveness of performance bonds, it is necessa ry to take a look at the number of defaults that have occurred during the analysis period. In order to do so, it is necessary to clarify what is meant by the word default. I n construction surety law, to constitute a legal default, there must be a material breach or series of material breaches of such magnitude that the obligee is justified in terminating the contract. Usually the principal is unable to complete the project leaving termination of the contract as the obligees only option ( 2 ). The U S Congr ess took a look at waiving performance bonds for certain projects a little ov er 68 years ago in the report entitled Amending the act of April 29, 1941, to authorize the
17 waiving of the requirement of performance and payment bonds in connection with certain contracts entered into by the Secretary of Commerce: report, to accompany H.R. 10068 (5 ). Some 47 years after passing the Heard Act Congress evaluated whether or not performance bonds could be waived for certain contracts The current trend, likewise i s repeating the same process of evaluating whether performance bonds can be waived for certain projects as well. In addition, a report entitled Better Performance Information Needed to Support Agency Contract Award Decisions published by the United States General Accountability Office (GAO) in April of this year 2009, mentions contractors who have defaulted on previous projects, receiving bid awards for new projects for which they qualify for. This recent awarding of contracts to defaulted contrac tors highlights the need for information on contract terminations when making contracting decisions. For example, a $280-million Army munitions contract was awarded to a contractor that had previously been terminated for default on several different contra cts. Subsequently this same contractor defaulted under that contract. The contracting officer stated that this information, if available would have factored into the contract award decision ( 6 ). 2.3 Current Development Looking at the current challenges fa cing DOTs with respect to contract awards to defaulting contractors, there is the need to consider putting checks and balances in place With the government relying on many of the same contractors to provide goods and services across agencies, the need to share information on contractors past performance in making contract awards decisions is critical (6 ). One such is t he Ontario Ministry of Transportations (MTOs) performance -based contractor prequalification program It is perhaps the most interesting e xample because this agency does not require performance/payment bonds or bid deposits from prequalified contractors. MTOs program was started in the late 1950s It not only provides an
18 incentive for contractors to perform well but also allows the agency t o accrue a tangible monetary benefit. With an annual construction program of roughly CDN$1.4 billion (equivalent to USD$1.3 billion ) and average Ontario performance/payment bond costs of 5% of contract cost, the estimated savings to the province is roughly $70 million per year (equivalent to USD$65 million per year) in bond costs (7 ). The current trend is to transition from performance bonds to a performance based system such as the one MTO has been using for over 50 years, where contractors are awarded projects based on their past w ork experience. Many of the performance rating systems currently in place use a questionnaire. Key elements in the current performance measurements by the DOTs are the contractors cooperation, schedule and product. Seven state s are already using an indexing system to rate or rank contractors. Those seven states are Connecticut, Maryland, Minnesota, Missouri, Utah, Virginia and Wisconsin. M ore comprehensive information is provided in the Transportation Research Board (TRB) repor t Quality -Based Performance Rating of Contractors for Prequalification and Bidding Purposes http://onlinepubs.trb.org/onlinepubs/nchrp/nchrp_w38.pdf (8 ). The next section below tak es a look at the current practices of the 30 states in this research. 2.4 Current State Practices Four strategies that DOTs use to qualify contractors: prequalification, post -qualification, performance bonds, and contractor licensing (1 ). Figure 2 1 belo w shows current practices of 35 DOTs. Out of that 35, the 23 can be found included in this research are Alaska, Colorado, Connecticut, Delaware, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Maine, Michigan, Minnesota, Montana, New Jersey, New York, Sou th Carolina, South Dakota, Texas, Washington, West Virginia, Wisconsin, and Wyoming.
19 Figure 2 1 State practices for prequalification for contract awards as reported by Minchin and Smith in the National Cooperative Highway Research Program (NCHRP) Qua lity -Based Performance Rating of Contractor s Prequalificatio n and Bidding Purposes (2001)
20 Figure 2 1 Continued
21 Those that do not have a prequalification system are Delaware, Maine, Minnesota, Montana, New York, and South Dakota. Minnesota bases its e ntire transportation building program on a system of incentives and disincentives. Colorado, likewise, does ratings based on test results. In addition to quality scores, incentive and disincentive amounts are listed for each contractor ( 1 ). Connecticut co nducts annual performance ratings of all contractors, including subcontractors, for a calendar year. Interim ratings are used to evaluate a contractors performance on a project to date and are conducted only when requested by the Offices of Construction o r Contracts. The data collected is available for decision support. West Virginia requires that contractors, through the West Virginia Contractors Licensing Law to Support Quality Construction, have a license issued by the Secretary of State. The Division of Highways oversees a traditional prequalification procedure based primarily upon a financial questionnaire and inquiry into bonding and equipment information. They have no formal contractors performance rating system ( 1 ). Wisconsin rates the prime cont ractor and each subcontractor at the time of contract completion or, if necessary, when a subcontractors work is completed. The primary purpose of the rating is to provide input when establishing a contractors bidding limit. Contractor bidding limits hav e both increased and decreased based upon this rating ( 1 ). Taking a look at all states, t he 1996 NCHRP Synthesis 190 reports that all states require a bond or the equivalent of a bond at some stage of the qualification process ( 9 ). The Surety and Fidelity Association of America (SFAA), a trade association of 450 companies that are licensed to provide surety and fidelity bonds, also reports in the 2009 Ohio HB 1 report, that all 50 states and the District of Columbia require surety bonds on state and local public works projects ( 10).
22 Although both reports mentioned that all states require bonds it is important to take a look at the performance bond practices of the 30 states. Table 2 1 below shows the performance bond threshold for each state If the contr act amount is above the threshold, a performance bond is required. States that have no thresholds are Delaware, Idaho, Ohio, and West Virginia (11). Table 2 1 State Bond Thresholds as reported by The Surety and Fidelity Association of America. No. St ate Threshold 1 Alabama $50, 000 2 Alaska $100, 000 3 Arizona $50, 000 4 Arkansas $20, 000 5 California $100, 000 6 Colorado $100, 000 7 Connecticut $100, 000 8 Delaware No Threshold 9 Georgia $100, 000 10 Hawaii $25, 000 11 Idaho No Threshold 12 Illinois $50, 000 13 Iowa $25, 000 14 Kansas $100, 000 15 Maine $125, 000 16 Michigan $50, 000 17 Minnesota $75, 000 18 Mississippi $25, 000 19 Montana $50, 000 20 New Jersey $100, 000 21 New Mexico $25, 000 22 New York $100, 000 23 Ohio No Threshold 24 South Carolina $50, 000 25 South Dakota $50, 000 26 Texas $100, 000 27 Washington $35, 000 28 West Virginia No Threshold 29 Wisconsi n $10, 000 30 Wyoming $7, 500 Obtained mostly from the states standard specifications, Appendix B gives information, about states performance bond requirements. States that require 100 percent of contract amount s
23 are Alabama, Arizona, Arkansas, Conn ecticut, Delaware, Georgia, Hawaii, Illinois, Iowa, Kansas, Maine, Michigan, Minnesota, Mississippi, Montana, New Jersey, New Mexico, New York, Ohio, South Carolina, South Dakota, Texas, Washington, West Virginia, and Wyoming. Alaska require s the performan ce bond to be equal to the payment bond amount when it is not specified in the contract. California is at least half of the contract price. Colorado states that the performance bond penal sum equal to the nearest integral one hundred dollars in excess of t he sum of the original bid items plus force account items. Idaho performance bond amount is no less than 85 percent of the contract amount. Wisconsin did not specify an amount but simply stated that the amount is on the bond form. Looking at the performanc e bond survey results from Synthesis 390 Concl usion 4, on pg. 56, the survey found that four states (Illinois, Iowa, Maryland and New Mexico) do not require performance bonding ( 7 Synthesis 390). When in the process of gathering information from the New Me xico DOT, a DOT official stated that New Mexico did require performance bond as is stated in the specification. Illinois and Iowa require performance bonding as well. An interesting point that was brought up by a FHWA official was whether the performance bond amount is always 100 perce nt of the contract amount since 7 states that gave responses of yes to Synthesis 390 survey results table, question 21, on pg. 78, has your organization ever required less than the full contract amount to be bonded (7 Synthes is 390) ? The next section discusses the methodology used to evaluate the cost -effectiveness of performance bond in this research.
24 CHAPTER 3 METHODOLOGY 3.1 Introduction This chapter reviews how the research data was collected from the DOTs and how the data was organized for analysis. 3. 2 Data Collection The DOTs were contacted via email phone or postal mail as shown in Figures 3 1 to Figure 3 3 below. Information was requested for all awarded public transportation construction contracts for the last two years including the name of the contractor type of project, the amount awarded for the project, and whether the contractor d efaulted on the project Some states, for example Utah, did not respond to the request. Others responded to the request but did not follow through with providing the data. There were some states that responded and provided data but not in the entirety (four parts to the information being requested). While collecting the data, some DOTs (Arizona DOT) were generous enough to not cha rge for processing that type of data since the research is for academic purposes. Others (Texas and California) responded quickly and were generous with the information they provided. Some charged for processing the data based on the volume of i nformation being requested For some states, simply sending an email request was not sufficient. An official request by filling out a form had to be made to the DOT based on the Public R ecord Access Act (See Figure 3 2 and Figure 3 3 ). Some states saw requesting thi s type of information as sensitive and were a little reluctant to r elease it. While others such as, Alaska, California, Colorado, Georgia, Idaho, Mississippi and New Jersey, Texas saw the information requested as public information. Colorado, Georgia, Id ah o, Mississippi and New Jersey all have the contract information displayed on their website.
25 If a state reported that it did have defaults, an additional email was sent requesting the name of the contractor that defaulted, the type of project that was defau lted, the project amount and the percent complete the project was when default occurred. Example of emails and a letter (See Figure 3 1) sent requesting contract information is shown below All DOTs required that a written request for the information be m ade. When a Department of Transportation (DOT) was initially contacted, the following email was sent: I am currently a graduate student here at the Civil and Coastal Engineering Department at the University of Florida. I am currently working on my thesis which is to evaluate the cost effectiveness of performance bonds. In order to do this, I need to obtain information for all awarded public transportation construction contracts for the last two years (September 07 to September 09). The information I am see king is the name of the contractor, type of project, the amount awarded for the project and if the contractor defaulted on the project (had the contract for the project terminated through some fault the contractor) or not. I am currently contacting all 50 DOTs to be able to do this analysis on a national level. Thank you for helping me gather information for my thesis. If the DOT was contacted via phone before an email was obtained, the following email was sent: As per the phone conversation earlier today, the information I am seeking is for all awarded public transportation construction contracts for the last two years (September 07 to September 09). Name of contractor, the type of project, the project amount, if the project was defaulted (had the contract for the project been terminated through some fault of the contractor) or not. If the file you are emailing is a big one, please send it to firstname.lastname@example.org because
26 my ufl account has a limited amount of mailb ox space. Thank you for helping me gather information for my thesis. Lorena Myers 117 NW 15 th Street Gainesville, FL 32603 September 13, 2009 Alabama Department of Transportation c/o Office Engineer Bureau 1409 Coliseum Boulevard Montgomery, AL 36110 Dear Office Engineer Bureau, I am currently a graduate student here at the Civil and Coastal Engineering Department at the University of Florida. I am currently working on my thesis which is to evaluate the cost effec tiveness of performance bonds. In order to do this, I need to obtain information for all awarded public transportation construction contracts for the last two years (September 07 to September 09). The i nformation I am seeking is the name of contractor, type of project, the amount awarded for the project, and if the contractor defaulted on the project (had the contract for the project terminated through some fault of the contract) or not. I am currently c ontacting all 50 DOTs to be able to do this analysis on a national level. Thank you for helping me gather information for my thesis. Sincerely, ____________ Lorena Myers Figure 3 1 The Alabama Department of Transportation letter requesting contract information September 2009. Below are a few of varying request forms were to the DOTs (Hawaii and Rhode Island) that have a public privacy act requirement that required forms to be filled out.
27 REQUEST TO ACCESS A GOVERNMENT RECORD DATE : September 13, 2009 TO : Hawaii Department of Transportation FROM : Lorena Myers Name or Alias 117 NW 15 th Street, Gainesville, FL 32603 Contact Information Email address: email@example.com and for bigger files firstname.lastname@example.org Although you are not required to provide any personal information, you should provide enough information to allow the agency to contac t you about this request. The processing of this request may be stopped if the agency is unable to contact you. Therefore, please provide any information that will allow the agency to contact you (name or alias, telephone or fax number, mailing address, e mail address, etc.). I WOULD LIKE THE FOLLOWING GOVERNMENT RECORD : Describe the government record as specifically as possible so that it can be located. Try to provide a record name, subject matter, date, location, purpose, or names of persons to wh om the record refers, or other information that could help the agency identify the record. A complete and accurate description of the government record you request will prevent delays in locating the record. Attach a second page if needed. \ The informa tion I am seeking is for all awarded public transportation construction contracts for the last two years (September 07 to September 09). Name of contractor, the type of project, the project amount, if the project was defaulted (had the contract for the pr oject been terminated through some fault of the contract) or not. I WOULD LIKE : (please check one or more of the options below) To inspect the government record. X A copy of the government record: ( Please check one of the opt ions below.) See the back of this page for information about fees that you may be required to pay for agency services to process your record request. Note: Copying and transmission charges may also apply to certain options. Pick up at agency ( date and time ): ______________________________________________ Mail Fax (toll free and only if available) X Other, if available (please specify): email to email@example.com If the agency m aintains the records in a form other than paper, please advise in which format you would prefer to have the record. X Electronic Audio Other (please specify): _____________________ Check this b ox if you are attaching a request for waiver of fees in the public interest (see waiver information on back). SEE BACK FOR IMPORTANT INFORMATION Figure 3 2 The Hawaii DOT request for information form sent September 2009.
28 F EES FOR P ROCESSING R ECORD R EQUESTS You may be charged fees for the services that the agency must perform when processing your record request, including fees for making photocopies and other lawful fees. The first $30 of fees charged for searching for a record, reviewing, and segregating will not be charged to you. Any amount over $30 will be charged to you Fees are as follows: Search for a Record $2.50 for 15 minutes Review and Segregation of a Record $5.00 for 15 minutes W AIVER OF F EES IN THE P UBLIC I NTEREST Up to $60 of fees for searching for, segregating and reviewing records may be waive d when the waiver would serve the public interest as described in section 2 71 32, Hawaii Administrative Rules. If you wish to apply for a waiver of fees in the public interest, you must attach to this request a statement of facts, including your identity as the requester, to show how the waiver of fees would serve the public interest. The criteria for this waiver, found at section 2 71 32, Hawaii Administrative Rules, are: (1) The requested record pertains to the operations or activities of an agency; (2) The r ecord is not readily available in the public domain; and (3) The requester has the primary intention and the actual ability to widely disseminate information from the government record to the public at large. A GENCY R ESPONSE TO Y OUR R EQUEST FOR A CCESS The agency to which you addressed your request must respond within a set time period. The agency will normally respond to you within 10 business days from the date it receives your request; however, in extenuating circumstances the agency must respond within 20 business days from the date of your request. If you have questions about the response time, you may contact the agencys UIPA contact person. If you are not satisfied with the agencys response, you may call the Office of Information Practices at 808 586 1400. R EQUESTER S R ESPONSIBILITIES You have certain responsibilities under 71 16, Hawaii Administrative Rules. You may obtain a copy of these rules from the Lieutenant Governor's Office or from the Office of Information Practices. These respon sibilities include making arrangements to inspect and copy records, providing further clarification or description of the requested record as instructed by the agency's notice, and making a prepayment of fees, if assessed. Figure 3 2 Continued
29 Figure 3 3 The Rhode Island DOT request for informatio n form sent September 2009.
30 Some challenges in obtaining information regarding defaults included the performance bond cost to the surety after default had occurred. That is, how much the surety spent to hire a new contractor, and the legal costs to investi gate whether or not the default is legal based on the contract conditions. The assumption was therefore, made that the surety cost for default ed projects was 50 percent; which is a conservative approach. On the topic of approach, the next section discus s es the method used to categorize the data. 3. 3 Data Organization In the public work sector that is specifically controlled by the DOTs, projects can be federal, state or combined federal and state. In addition, projects can be categorized into several su b sections such as bridges, electrical, maintenance, clearing (cleaning shrubbery), roadway resurfacing, roadway rehabilitation, and, from the MTO model, contractors are rated in five work classifications: general road, structures, electrical, structural coating, and general maintenance ( 7 ). As illustrated above, there were many ways in which the data could have been categorized. During the data collection period, the initial approach to categorized projects was in terms of defaulted projects that would have defined the data set into the most and least at risk projects. To be able to do that, the data would have had to been placed into specific categorizes that would make the analysis consistent. That is, for example, all the projects being analyzed would have had to be roadway surfacing and completive bid. Due to the ti me period of the analysis categorizing projects in this fashion would have been a little challenging since 30 states were being analyzed. So, the methodology was redefined to take a look at defaulted projects. Since performance bonds have a direct relationship to defaulted projects, the decision was made to do the analysis based on defaulted projects.
31 The first step in the analysis was to obtain an estimate of the surety performance bond premium. Many surety reports indicate that surety bonds, a dependable, proven, and reliable protection against contractor failure, cost between one and three percent of the total contract price. On very large projects, surety bonds may cost less than one p ercent. Surety bonds are a wise investment in protecting an owner from contractor default ( 1 2 ). Likewise, the SFAA reports the cost of the perform ance bond one time premium as typically ranging from 0.5 2 percent of the contract amount. The information g athered from SFAA helped to categorizing the projects in terms of performance bond premium (13), into f our categories as shown in Table 3 1 below Table 3 1. Performance Bond one time premium as reported by SFAA Contract Amount Performance Bond Premium Project Size Category Percentage $100, 000 $1, 200 to $2, 500 < $1 Million 2.50% $1 Million $7, 700 to $13, 500 $1 Million to < $10 Million 1.35% $10 Million $56, 950 to $81, 000 $10 Million to < $50 Million 0.81% $50 Million $206, 475 to $341, 000 > $50 Million 0.68% Table 3 1 shows performance bond premium for various contract amounts. Based on these surety reports, that provided a range for performance bond premium, the decision was made to use the upper limit of the performance bond premium in Table 3 1 with a corresponding monetary category to estimate a percentage. The first two categories we re given in the surety report. Values in the Project Size Category column were added in order to allow calculation of bond premium cost for all projects as is shown in Appendix A. Values in the Percentage column were calculated using the upper limit performance bond premium from column 2 and dividing it by the contract amount, the first column and multiplying the result by 100 percent. An altern ative way (courtesy of a Federal Highway Administration official) to approach establishing percentages for performance bond premiums would be to divided the averages of column 2
32 premiums by the column 1 contract amounts and the result would be 3.7%, 1.06%, 0.69%, and 0.55%. The cost of a performance bond premium will vary because it is dependent on the size and type of the project and the contractors bonding capacity ( 1 3 ). Looking at the percentage in the last column, the table shows that percentage decrea se as the size of the project increases. The reason is because mega projects are broken into smaller portions as discussed below. It is not uncommon in todays construction environment for projects to exceed $500 million or even $1 billion. Tremendous popu lation growth was spurred the need for infrastructure improvements and many of these public construction initiatives exceed $1 billion. Many sureties prefer to spread their risk by having project owners break up a large megaproject into multiple large proj ects (to the extent they can be broken up), notes Mike Cusack, senior vice president, managing director and operations board member, Aon Construction Services Group. Sureties want multiple contractors on multiple projects, he explains. If the logistics of a megaproject prevent breaking the job into multiple projects, the surety industry will require joint venture participation of well qualified and well -capitalized construction companies. Terry Cavanaugh, chief operating officer, Chubb Surety, adds, A b enefit to breaking a large project up into smaller contracts is increased competition. Smaller contracts attract more contractors who have the capability to bid on a project ( 14). Bill Marino, chairman and CEO, Allied North America, says, From the perspe ctive of the owner, joint ventures and the corresponding co-surety structure necessary to support the larger bond penal sums are beneficial. There is a joint and several contractual relationships that exist between the contractors and the owner, as well as a joint and several relationships that exist between the co -sureties and the owner. In the event that one of the joint ventures contracting entities fails, it becomes the responsibility of their partners to assume their contractual
33 responsibility. Simila rly, in the event that one of the co -sureties is not capable of meeting their obligations under the bond, it becomes the responsibility of the remaining sureties to assume their exposure ( 14). This see ms to indicate that sureties analyze how provide the c overage necessary to provide performance bonding in an economical way and minimize problems that would typically arise. The upcoming section provides and discusses the results of the methodology use to analyze the cost -effectiveness of performance bonding.
34 CHAPTER 4 RESULTS, ANALYSIS AND DISCUSSION 4.1 In troduction This chapter takes presents the results, analysis and discussion to determine whether it is cost effective to use performance bonds or not. 4.2 Results In order to do the cost -effectiveness a nalysis of performance bonds, an analysis of the benefit/ cost of having performance bonds in the four states with defaulted projects for the last two years ( September 2007 to September 2009) was done. The total costs of the defaulted projects as a ratio of the total number of projects is discussed as well. Other information that is included are the percentage complete of the projects when default occurred and the total number of defaulted contractors out of the total number of contractors that received proj ect awards from the four states fitting the category of having defaults. To start of the analysis, information about all states projects and total default information is given in Table 4 1 below. Table 4 1 below shows the number of defaults for each s ta te and the approximate total number of projects for research period 2007 to 2009. All values entered in the tables are as reported by the states. Table 4 1. States total n umber of default s and projects information for 07 09. No. State Number of De faults Total Projects 1 Alabama 7 631 2 Alaska 0 187 3 Arizona 0 205 4 Arkansas 0 408 5 California 0 1237 6 Colorado 0 326 7 Connecticut 0 134 8 Delaware 0 170 9 Georgia 19 513 10 Hawaii 0 129 11 Idaho 2 188 12 Illinois 0 2682
35 Table 4 1. Continued No. State Number of Defaults Total Projects 13 Iowa 0 1424 14 Kansas 0 643 15 Maine 0 545 16 Michigan 0 1303 17 Minnesota 0 447 18 Mississippi 2 392 19 Montana 0 231 20 New Jersey 0 256 21 New Mexico 0 126 22 New York 0 559 23 Ohio 0 1393 24 South Carolina 6 681 25 South Dakota 0 292 26 Texas 1 1333 27 Washington 0 650 28 West Virginia 0 945 29 Wisconsin 0 901 30 Wyoming 0 2 04 4.3 Analysis Using Table 3 1, the percentage cost of the performance bond premium was applied to each project for all 30 states. Appendix A Table A 1 shows how the individual projects are categorized in the corresponding price range and percent bond premium cost to surety. Table 4 2 below shows the original cost of all projects, the cost of bond premium to the surety a nd the total number of projects for all 30 states. The total cost of all states projects c ombined for the last two years wa s $ 51, 927, 090, 826 and the total cost of all performance bond premiums was $593, 000, 000 or an equivalent of 1.142 percent of the total project costs The total number of projects awarded was 19, 173. Please note that, in the case of Idaho, the contract awards data could only be obtained up to December of 2008 because the data prior to that was deleted from the website. Courtesy of a Federal Highway Administration official, the percent obtained in Table 4 2 is around 1 percent and does not compare with MTOs 5 perce nt ( 7 ). In section 3.3 Data Organization section, the reason for a decrease in interest rate as the performance bond premium
36 increased was because sureties had discovered how to work together to reduce the cost of projects. There is reason to believe that this might contribute to the difference between the percentages. Table 4 2 States Original cost of projects, Bond Premium to Surety and total projects i nformation for 07 09. No. State Original Cost Bond Premium Total Projects 1 Alabama $1, 44 2, 902, 272.23 $17, 692, 293. 41 631 2 Alaska $809, 449, 179.23 $8, 573, 850.53 187 3 Arizona $1, 600, 656, 820.58 $14, 350, 967.89 205 4 Arkansas $817, 217, 457.10 $10, 312, 799.89 408 5 Californ ia $4, 511, 000, 828.23 $46, 107, 973.83 1237 6 Colorado $798, 099, 709.03 $10, 270, 813.75 326 7 Connecticut $1, 463, 076, 429.07 $12, 356, 052.58 134 8 Delaware $354, 338, 346.14 $4, 829, 758.68 170 9 Georgia $1, 536, 868, 015.91 $18, 034, 485.62 513 10 Hawaii $430, 535, 237.92 $4, 653, 012.66 129 11 Idaho $6 44 374, 838 04 $7, 230 086 94 1 92 12 Illinois $3, 670, 007, 329.67 $53, 195, 750.67 2682 1 3 Iowa $1, 711, 395, 839.83 $24, 617, 299.54 1424 14 Kansas $1, 144, 606, 054.61 $13, 622, 288.39 643 15 Maine $1, 152, 569, 066.57 $15, 359, 930.09 545 16 Michigan $2, 160, 533, 88 1.73 $29, 027, 635.42 1303 17 Minnesota $1, 666, 376, 259.62 $17, 370, 360.55 447 18 Mississippi $1, 356, 422, 262.75 $15, 484, 356.48 392 19 Montana $579, 074, 020.80 $7,449, 512.95 231 20 New Jersey $1, 928, 373, 439.99 $18, 668, 802.95 256 21 New Mexico $775, 577 646.78 $7, 759, 073.65 126 22 New York $2, 834, 889, 153.48 $28, 678, 216.00 559 23 Ohio $2, 856, 017, 473.98 $34, 688, 219.00 1393 24 South Carolina $1, 138 306 76 6 89 $1 5 519 605 09 715 25 South Dakota $582, 638, 520.64 $7, 476, 267.89 292 26 Texas $5, 453, 915, 663.07 $59, 887, 883.77 1333 27 Washington $4, 357, 111, 404.32 $39, 615, 276.95 650 28 West Virgi nia $1, 162, 017, 166.16 $14, 968, 176.68 945 29 Wisconsin $2, 310, 381, 065.44 $27, 875, 716.65 901 30 Wyoming $678, 358, 676.51 $7, 670, 376.36 204 Table 4 3 below provides information on defaulted contracts. It sh ows the contractor (for privacy, the name of the contractor was replaced with a letter and the states with the corresponding defaults w ere not mentioned), the type of project, the contract award amount and
37 the approximate percentage of the project that was completed at the time of default. For projects that had a bid range of $390,000 to $480,000 the upper limit was used at the contract award amount. The number of projects that were the same project type was numbered to show the number of occurrence of that project type in the defaults. All values for columns 1, 2, 3 and 5 are as reported by the states that had defaults. Column 3 values were either obtained directly from the DOT or obtained via internet on the states website. Looking at the highest number of defaults that occurred from any one contractor, contractor D defaulted on 17 projects. The assumption is made that in the last two years, he/she was awarded projects because of good performance or performance bond standing but w ent bankrupt and defaul ted on the projects all at once. Table 4 3 All 7 States default contractor, type of default, cost of project and approximate percent complete of project at time of default for 2007 2009. No Contractor Type of Project Contract Amount Approximate % Complete at Default 1 A Grade, Drainage, Pavement, Bridge and Signals $6, 189, 906.60 100 2 A Bridge Replacement (bridge culvert) and Approaches (Project 1) $714, 000.00 100 3 A Removal of Structures at the Salvage Yard $480, 000.00 1 00 4 B Widening (Project 1) $2, 950, 000.00 66 5 B Bridge Replacement and Approaches (Project 2) $4, 000, 000.00 68 6 B Relocation $3, 475, 000.00 65 7 C Bridge Approaches (Project 3) 100 8 D State Route Surfacing (Project 1) $738, 130.00 0
38 Table 4 3 Continued. No Contractor Type of Project Contract Amount Approximate % Complete at Default 9 D State Route Surfacing (Project 2) $1, 409, 580.00 0 10 D Widening (Project 2) $9, 376, 306.00 80 11 D Widening (Project 3) $77, 789, 276.00 90 12 D Widening (Project 4) $55, 281, 144.00 70 13 D Widening (Project 5) $40, 749, 261.00 40 14 D Widening (Project 6) $12, 469, 439.00 65 15 D Widening (Project 7) $17, 819, 608.00 45 16 D Widening (Project 8) $18, 862, 592.00 40 17 D Widening (Project 9) $18, 811, 311.00 0 18 D Widening (Project 10) $4, 624, 063.00 70 19 D State Route Surfacing (Project 3) $2, 129, 159.00 30 20 D State Route Surfacing (Pro ject 4) $1, 777, 346.00 25 21 D Bridge Replacement (Project 1) $3, 728, 832.00 60 22 D Bridge Replacement (Project 2) $2, 558, 669.00 50 23 D New Construction $16, 601, 857.00 99 24 D Interchange Reconstruction $9, 761, 799.00 9 9 25 E Widening (Project 11) $26, 292, 771.00 85 26 E Widening (Project 12) $12, 469, 439.00 99 27 F Concrete Sidewalks and Signage $496, 316.00 0 28 F Minor Excavation and Paving Pathway $208, 542.00 0
39 Table 4 3 Continued. No Contractor Type of Project Contract Amount Approximate % Complete at Default 29 Building 10 30 Bridge Painting 75 31 G Traffic Signals $1, 496, 890.00 32 H Widening (Project 13) $14, 520, 727.00 33 I Sidewalk $177, 213.98 34 J Widening (Project 14) $1, 794, 116.89 35 J Intersection Improvements $1, 203, 259.03 36 J Intersection Improvements $2, 159, 894.85 37 K Wastewater Treatment $748, 780.00 0 Information could not be found For the purposes of this research, the definition of a state that was in true default was one that had a contractor defaulted on an awarded roadway project that excluded buildings. Based on this, two states out of the six were excluded for the benefit cost analysis. Table 4 4 below shows the total number of defaulted contractors contractors, and number of projects for the four states that fit the definition of having defaults. For Alabama, the total number of defaulted contractors, for the last two years, was 3 for a total number of 7 defaulted projects (See Table 4 1 above). Two contractor s defaulted on 3 projects each Highest number of contracts awarded to one contractor was 48 projects For Georgia, the total number of defaulted contrac tors, for the last two years, was 2 for a total number of 19 defaulted projects. One contractor de faulted 17 of those 19 projects (Table 4 1 above) Although 17 seems like a large number of projects for one contractor. It is not uncommon for one contractor to have many projects. For example, one
40 contractor was awarded 102 projects Looking at Idaho, the total number of defaulted contractors was 1 for a total number of 2 defaulted projects (Table 4 1 above). Highest number of contracts awarded to one contrac tor was 18. Finally, South Carolina total number of defaulted contractors was 4 for a total number of 6 defaulted projects ( Table 4 1 above) Highest number of contracts awarded to one contractor was 69 projects. Table 4 4 States total number of default ed contractors, contractors and projects State Total number of defaulted contractors Total number of contractors Total number of projects Alabama 3 105 631 Georgia 2 91 513 Idaho 1 75 188 South Carolina 4 111 681 In developing Table 4 5 below to c alculate the total cost of performance bond premiums (last column) for each of the four states, the assumption is made that the surety pays 50 percent of performance bond to complete the project, representing a benefit to the DOT from the use of performanc e bonds. Based on the 2008 surety market overview the surety industry lost half of the total money spent on defaults during the years 2002 2005. SFAA reports that sureties have paid more than $11 billion on contractor defaults since 1994. Half of that was paid between 2002 and 2005 (1 5 ). Table 4 5 States total cost of default projects, 50% of total cost of default projects and surety cost of all projects for 2007 2009. State Total cost of Defaulted Projects 50% of total cost of Defaulted Proj ects Total Cost of Bond Premiums Alabama $17, 598, 906. 60 $8, 799, 453.30 $17, 692, 293.41 Georgia $332, 347, 230 $166, 173, 615.00 $ 1 8, 034, 485.62 Idaho $704, 858.00 $352, 429.00 $7, 067, 183. 59 South Carolina $7, 974, 633.78 $3, 987,316.89 $14, 6 66, 964.23 Table 4 6 below shows the benefit/cost (B/C) ratio from the use of performance bonds by the four states during the 20072009 analysis period. The benefit/cost ratio is obtained by dividing the values in the 50% of Total Cost of Defaulted P roj ects column (a benefit to the
41 state) by the values in the total cost of bond premiums column (a cost to the state). From the results, one can see that Georgia is the only state where the benefits outweighed the costs. In the other three states, the sure ties made a profit. C ourtesy of a Federal Highway Administration official, sureties are in it for the money, and they deserve to make some profit in view of the risk they are taking and the service they provide. But the amount of profit they are making, es pecially at the expense of DOTs that have few or no defaults, is simply staggering. It shows that there is a need to seriously think about replacing perform ance bonds with another system such as the (Ontario Model) in Synthesis 390 While Table 4 8 gives B /C ratios for the states; it is a simple matter to calculate B/C ratios from the suretys viewpoint as they are the inverse of the state B/C ratios. A state B/C is 0.50 translates to a surety B/C of 2.0. In other words, if benefits to the state are 1/2 of costs, then costs to the state (which are benefits to the surety) are twice the expenses to the surety. The B/C ratios from the viewpoint of the surety are 2 (AL), 0.11 (GA), 20 (ID), and 3.70 (SC). Of course, additional costs to the surety for finishing defaults projects decrease the surety B/C somewhat. Table 4 6 States surety cost of default projects for 2007 2009 in relation to the total surety cost of all projects for the same time period. State 50% of total cost of Defaulted Projects (B ) T otal Cost of Bond Premiums (C) Benefit /Cost (B/C) Ratio for State Alabama $8, 799, 453.30 $17, 692, 293.41 0.50 Georgia $166, 173, 615.00 $ 18, 034, 485.62 9.21 Idaho $352, 429.00 $7, 067, 183. 59 0.05 South Carolina $3, 987,316.89 $14, 666, 964.23 0.27 Table 4 7 below shows the total number of defaulted projects total cost of the defaulted projects, total number of all projects and the total cost of all projects for the four states with defaults. The values for the total number of defaulted projects for each state can also be found in Table 4 1.
4 2 Table 4 7 States default projects and cost, all projects and total cost for 2007 to 2009. State Defaulted Projects Total cost of Defaulted Projects All Projects Total cost of All Projects Alabama 7 $17, 598, 906. 60 631 $1, 443, 162, 230.10 Georgia 19 $332, 347, 230.00 513 $1, 536, 868, 015.91 Idaho 2 $704, 858.00 188 $629, 142, 232.99 South Carolina 6 $7, 974, 633.78 681 $1, 061, 600, 282.34 Table 4 8 below shows the total cost of defaulted projects in the fir st column, the total cost of all projects, representing a cost to the surety, in the second column and the percent of defaulted projects to total number of projects in third column. The value of % Defaulted Project of All Projects is obtaine d by dividing the v alue of Total cost of Defaulted Projects by the v alue of Total cost of All Projects and multiplying by a 100 percent. Table 4 8 States cost of default projects as a percent of total cost of projects for 2007 to 2009. State Total c ost of Defaulted Projects Total cost of All Projects % Default Project of All Projects Alabama $17, 598, 906. 60 $1, 443, 162, 230.10 1.219 Georgia $332, 347, 230 $1, 536, 868, 015.91 21.625 Idaho $704, 858.00 $629, 142, 232.99 0.112 South Carolina $7 974, 633.78 $1, 061, 600, 282.34 0.751 To summarize Tables 4 6 and 4 8 Alabama total cost of defaulted projects as a percentage of the total cost of projects was 1.22 percent and its Benefit/Cost (B/C) was 0.50. Georgia cost of default was 21.63 perce nt but its B/C was 9.21. Idaho cost of default was 0.11 percent and B/C was 0.05 South Carolina cost of default was 0.75 percent with a B/C of 0.27. The results indicate that during the 2 -year analysis period, it turned out that Alabama s Idahos and Sou th Carolina s requirements for performance bonding (which includes their criteria for defaulting) were not cost effective. For Georgia, the use of performance bonds was cost effective primarily because that state had a relatively large number of defaults for some reason.
43 CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS 5.1 Summary This chapter presents conclusions and recommendations from this research study. The study compared the total cost of project performance defaults to the surety (a benefit to the state ) against the total cost of premiums to arrive at a cost/benefit ratio for the state. When the benefits exceed the costs, the ratio is greater than 1, and the use of performance bonds can be viewed as being cost effective. 5.2 Conclusions For the September 2007 to September 2009 analysis period, it turns out that the use of performance bonding in Alabama, Idaho, and South Carolina was not cost effective to those states. For Georgia, indications are the use of performance bonds was cost effective, primarily because that state had a relatively large number of defaults for some reason. Also, it is obvious from the collected data that for the remaining 26 states that provided data, the use of performance bonds in those states was not cost effective. Thus, the da ta and its analysis indicates Georgia was the only state where having a performance bond requirement proved to be cost effective. However, one should not reach the conclusion that Georgia was a winner. Certainly, having a relatively large number of defau l ted projects was not their goal. We must keep in mind too that sureties might well raise the cost of premiums on Georgias projects based on that states recent history. The cost of premiums in Ontario was cited as 5 percent compared to the 20072009 nati onal U.S. average of 1.139 percent (which is also close to the Georgia average). Although no analysis was done, it was interesting to see from the collected data that the project type experiencing the highest number of defaults was wi dening (14 out of 37 ). From the collected data also out of the total number of defaults of one state that had 19 defaults, one
44 contractor defaulted 17 times out of the 19. It can be assumed that contractor probably had a good past performance record and that it probably went bankrupt all at once resulting in numerous defaulted projects An analogy to illustrate how performance bonds work is that of car insurance. Car insurance has coverage duration. Likewise, performance bonds have coverage duration. A safe driver, who has ne ver been in an accident, does not benefit from having the insurance because the terms and conditions of the contract are such that the insurance will only come into effect in the event of an accident. A terrible driver, on the other hand, who is continuall y having accidents, it is beneficial to have car insurance The only catch is that the percentage of the car insurance premium goes up every time that driver gets into an accident. Likewise, states that experience defaults benefit from having performance bonding. But if no defaults occur, states do not see a benefit. In light of this, this research results is not suggesting getting rid of performance bonding. The recommendation would be to require performance bonding on projects that are more likely to be d efaulted. 5.3 Recommendations For the cost effectiveness of performance bonds to be more fully and better analyzed more detailed information about the benefits and cost to the agency, contractor and surety need to be collected. For example, a nalyzing projects using different categories such as duration of projects, type of projects (roadway surfacing, roadway rehabilitation, roadway preventative maintenance, hot mix asphalt roadway, concrete roadway, bridge replacement, traffic, drainage, electrical, fe deral, state, combined state and federal, design bid -build, competitive bid, and so on) would help to give a clearer picture of which projects are problematic and would require performance bonding.
45 Future data collection and analysis efforts could also ex amine: Contractors who go bankrupt under one name but later surface under a new name for business are awarded projects after having a history of poor performance. State practices with respect to whether performance bonds are required for all projects or f or only a selected few. State practices with respect to establishing what criteria constitute a default and how well the criteria are enforced. Do a more in depth study of states laws and requirements for performance bonds and whether or not it can be waiv ered. Whether current state laws would allow performance bonds to be replaced (either partially or completely) with another system to better assure satis factory contractor performance. It would be of interest and likely beneficial to compare the criteria f or defaulting among various states as it wa s beyond the scope of study Defaults between the years 2002 and 2005 since the surety industry lost half of the total money spent on defaults during that time period ( 15).
46 APPENDIX A CATEGORIZING PROJECTS USING SURETY BOND PREMIUMS Table A 1 shows the bond premium categorizes for the individual projects for each of the 30 state s F or all 30 states, the original cost of the projects, the total cost of the performance bond premium and the total number of projects t o the corresponding price range and percentage performance bond premium cost were calculated for the period, September 2007 to September 2009, as is shown below
47 Table A 1 States original and s urety cost for all projects with correspo nding price ran ge and percent bond premium from 07 to 09. No. State Total < $1, 000, 000 $1, 000, 000 to < $10, 000, 000 $10, 000, 000 to < $50, 000, 000 % Bond Premium 2.50% 1.35% 0.81% 0.68% 1 Alabama Original Surety Projects $1 442, 902, 272.23 $17, 692, 293.41 631 $132, 474, 640.47 $3, 311, 866.01 317 $747, 101, 397.59 $10, 085, 868.87 291 $356, 877, 033.84 $2, 890, 703.97 20 $206, 449, 200.33 $1, 403, 854.56 3 2 Ala ska Original Surety Projects $809, 449, 179.23 $8, 573, 850.53 187 $28, 924, 415.73 $723, 110.39 85 $307, 328, 039.48 $4, 148, 928.53 84 $372, 364, 528.02 $3, 016, 152.68 17 $100, 832, 196.00 $685, 658.93 1 3 Arizona Original Surety Projects $1, 600, 656, 820.58 $14, 350, 967.89 205 $36, 969, 400.44 $924, 235.01 90 $315, 830, 048.45 $4, 263, 705.65 82 $521, 228, 538.09 $4, 221, 951.16 25 $726, 628, 833.60 $4, 941, 076.07 8 4 Arkansas Original Surety Projects $817, 217, 457.10 $10, 312, 799.89 408 $111, 924, 706.33 $2, 798, 117.66 287 $333, 668, 694.81 $4, 504, 527.38 100 $371, 624, 055.96 $3, 010, 154.85 2 1 $0.00 $0.00 0 5 California Original Surety Projects $4, 511, 000, 828.23 $46, 107, 973.83 1237 $331, 944, 690.43 $8, 298, 617.26 763 $1, 218, 728, 951.81 $16,452,840.85 412 $943, 300, 659.23 $7,640,735.34 53 $2, 017, 026, 526.76 $13, 715, 780.38 9
48 Table A 1 Continued No. State Total < $1, 000, 000 $1, 000, 000 to < $10, 000, 000 $10, 000, 000 to < $50, 000, 000 % surety cost 2.50% 1.35% 0.81% 0.68% 6 Colorado Original Surety Projects $798, 099, 709.03 $10, 270, 815.75 326 $81, 609, 342.47 $2, 040, 233.56 183 $449, 446, 337.21 $6, 067, 525.55 128 $2 67, 044, 029.35 $2, 163, 056.64 15 $0.00 $0.00 0 7 Connecticut Original Surety Projects $1, 463, 076, 429.07 $12, 536, 052.58 134 $17, 875, 621.07 $446, 890.53 27 $271, 601, 144.44 $3, 666, 615.45 8 5 $340, 052, 994.34 $2, 754, 429.25 16 $833, 546, 669.22 $5, 668, 117.35 6 8 Delaware Original Surety Projects $354, 338, 346.14 $4, 829, 758.68 170 $34, 422, 325.93 $860, 558.15 7 2 $255, 163, 105.34 $3, 444, 701.92 94 $64, 752, 914.87 $524, 498.61 4 $0.00 $0.00 0 9 Georgia Original Surety Projects $ 1, 536, 868, 015.91 $ 18, 034, 485.62 513 $115, 8 76, 995.82 $ 2, 896, 924.90 203 $ 684, 916, 865.40 $ 9, 246, 377.68 276 $ 681, 445, 220.94 $ 5, 519, 706.29 33 $ 54, 628, 933.75 $ 371, 476.75 1 10 Hawaii Original Surety Projects $430, 535, 237.92 $4, 6 53, 012.66 1 29 $23, 229, 093.12 $580, 727.33 67 $173, 449, 671.48 $2, 341, 570.56 54 $108, 069, 811.27 $875, 365.47 6 $125, 786, 662.05 $855, 349.30 2
49 Table A 1 Continued No. State Total < $ 1, 000, 000 $1, 000, 000 to < $10, 000, 000 $10, 000, 000 to < $50, 000, 000 % surety cost 2.50% 1.35% 0.81% 0.68% 11 I d ah o Original Surety Projects $ 644, 374, 838.04 $ 7, 230, 086.94 1 92 $ 37, 972, 654.84 $ 949, 316.37 8 5 $ 253, 502, 386.34 $ 3, 422, 282.22 91 $ 352, 899, 796.86 $ 2, 858, 488.35 1 6 $0.00 $0.00 0 12 Illinois Original Surety Projects $3, 670, 007, 329.67 $53, 195, 750.67 2682 $701, 218, 192.87 $17, 530, 454.82 1779 $2, 146, 934, 853.88 $28, 983, 620.53 856 $821, 854, 282.92 $6, 681, 675.32 47 $0.00 $0.00 0 13 Iowa Original Surety Projects $1, 711, 395, 839.83 $24, 617, 299.54 1424 $314, 246, 272.48 $7, 856, 156.81 1043 $1, 021, 708, 589.57 $13, 793, 065.96 360 $319, 290, 845.43 $2, 586, 255.85 20 $56, 150, 132.35 $381, 820.92 1 14 Kansas Original Surety Projects $1, 144, 606, 054.61 $13, 622, 288.39 643 $144 746, 074.32 $3, 618, 651.86 454 $393, 557, 328.76 $5, 313, 023.94 170 $436, 734, 278.85 $3, 537, 547.66 16 $169, 568, 372.68 $1, 153, 064.93 3 15 Maine Original Surety Projects $1, 152, 569, 066.57 $ 15, 359, 930.09 545 $85, 949, 667.88 $2, 148, 741.70 216 $846, 587, 271.14 $11, 428, 928.16 318 $220, 032, 127.55 $1, 782, 260.23 11 $0.00 $0.00 0
50 Table A 1 Continued No. State Tot al < $1, 000, 000 $1, 000, 000 to < $10, 000, 000 $10, 000, 000 to < $50, 000, 000 % surety cost 2.50% 1.35% 0.81% 0.68% 16 Michigan Original Surety Projects $2, 160, 533, 881.73 $29, 027, 635.42 1303 $378, 777, 867.31 $9, 469, 446.68 884 $961, 959, 757.17 $12, 986, 456.72 381 $767, 013, 437.11 $6, 212, 808.84 37 $52, 782, 820.14 $358, 923.18 1 17 Minnesota Original Surety Projects $1, 666, 376, 259.62 $17, 370, 360.55 447 $94, 979, 572.47 $2, 374, 489.31 255 $516, 666, 194.76 $6, 974, 993.63 167 $652, 854, 045.84 $5, 288, 117.77 21 $401, 876, 446.55 $2, 732, 759.84 4 18 Mississippi Original Surety Projects $1, 356, 422, 262.75 $15, 484, 356.48 392 $62, 546, 654.17 $1, 563, 666.35 131 $637, 092, 166.86 $8, 600, 744.25 225 $656, 783,441.72 $5, 319, 945.88 36 $0.00 $0.00 0 19 Montana Original Surety Projects $579, 074, 020.80 $7, 449, 512.95 2 3 1 $49, 215, 765.53 $1, 230, 394.14 118 $356, 901, 284.09 $4, 818, 167.34 1 02 $172, 956, 971.18 $1, 400, 951.47 1 1 $0.00 $0.00 0 20 New Jersey Original Surety Projects $1, 928, 373, 439.99 $18, 668, 802.95 2 5 6 $35, 386, 837.63 $884, 670.94 64 $638, 562, 248.71 $8, 620, 590.36 162 $487, 273, 878.46 $3, 946, 918.42 25 $767, 150, 475.19 $5, 216, 623.23 5
51 Table A 1 Continued No. Stat e Total < $1, 000, 000 $1, 000, 000 to < $10, 000, 000 $10, 000, 000 to < $50, 000, 000 % surety cost 2.50% 1.35% 0.81% 0.68% 21 New Mexico Original Surety Projects $775, 577, 646.78 $7, 759, 073.65 1 26 $18, 809, 268.93 $470, 231.72 41 $214, 632, 976.59 $2, 897, 545.18 57 $542, 135, 401.26 $4, 391, 296.75 28 $0.00 $0.00 0 22 New York Original Surety Projects $2, 834, 889, 153.48 $28, 678, 216 .00 559 $109, 786, 727.18 $2, 744, 668.18 191 $917, 850, 804.68 $12, 3 90, 985.86 311 $964, 038, 848.48 $7, 808, 714.67 5 1 $843, 212, 773.14 $5, 733, 846.86 6 23 Ohio Original Surety Projects $2, 856, 017, 473.98 $34, 688, 219 .00 1393 $ 368 196 143 06 $ 9 204, 903. 58 876 $ 1 160 ,1 98, 992 80 $ 15, 672, 406 40 478 $60 6, 7 1 3, 4 01.36 $ 4 909, 680. 55 31 $ 720, 768, 936 76 $ 4, 901, 288.77 8 24 South Carolina Original Surety Projects $ 1, 138, 306, 766.89 $ 15, 519, 605.09 715 $ 186, 418, 629.25 $ 4, 660, 465.73 4 49 $ 598, 943, 168.60 $ 8, 805, 732.78 249 $ 287, 215, 994.04 $2, 326, 449.55 1 6 $65, 728, 975.00 $446, 957.03 1 25 South Dakota Original Surety Projects $582, 6 38, 520.64 $7, 476, 267.89 2 92 $56, 078, 678.69 $1, 401, 966.97 1 6 8 $335, 030, 779.61 $4, 522, 915.52 111 $191, 529, 062.34 $1, 551, 385.40 13 $0.00 $0.00 0
52 Table A 1 Continued No. S tate Total < $1, 000, 000 $1, 000, 000 to < $10, 000, 000 $10, 000, 000 to < $50, 000, 000 % surety cost 2.50% 1.35% 0.81% 0.68% 26 Texas Original Surety Projects $5, 453, 915, 663.07 $59, 887, 883.77 1333 $253, 284, 571.36 $6, 332, 114.28 501 $2, 345, 788, 359.55 $31, 668, 142.85 732 $1, 903, 612, 356.93 $15, 419, 260.09 92 $951, 230, 375.23 $6, 468, 366.55 8 27 Washington Original Surety Projects $4, 357, 111, 404.32 $39, 615, 276.95 650 $129, 748, 428.51 $3, 243, 710.71 300 $ 839, 835, 852.36 $11, 337, 784.01 270 $1, 537, 382, 921.54 $12, 452, 801.66 66 $1, 850, 144, 201.91 $12, 580, 980.57 1 4 28 West Virginia Original Surety Projects $1, 162, 017,166.16 $14, 968, 176.68 945 $258, 125, 863.54 $6, 453, 146.59 792 $271, 944, 057.61 $3, 671, 244.78 129 $420, 418, 497.66 $3, 405, 389.83 21 $211, 528, 747.35 $1, 438, 395.48 3 29 Wisconsin Original Surety Projects $2, 310, 381, 065.44 $27, 875, 716.65 901 $197, 530, 189.66 $4, 938, 254.74 462 $1, 092, 894, 746.51 $14, 754, 079.08 384 $959, 754, 729.90 $7, 774, 013.31 54 $60, 201, 399.37 $409, 369.52 1 30 Wyoming Ori ginal Surety Projects $678, 358, 676.51 $7, 670, 376.36 204 $39, 672, 310.55 $991, 807.76 90 $294, 462, 708.11 $3, 975, 246.56 95 $278, 923, 976.58 $2, 259, 284.21 18 $65, 299, 681.27 $444, 037.83 1
53 APPENDIX B 30 STATES PRACTICES PERFORMANCE BONDS Alabama Department of Transportation 2008 Standard Specifications General Provisions Section 103 Award and Execution of Contract Subsection 103.05 Requirements of Contract Bonds (a) Performance Bond sp ecifies that the bidder to whom the award is made shall within 15 days after the prescribed forms have been presented to him for signature (i.e. after date of award), furnish and file with the Transportation Director an acceptable surety bond on the form i ncluded in the proposal in an amount equal to 100 percent of the contract bid price of the contract awarded (16). Alaska Department of Transportation and Public Facilities 2004 Standard Specifications for Highway Construction General Provisions Section 103 Award and Execution of Contract Subsection 1031.05 Performance and Payment Bonds specifies that the successful bidder shall furnish all required Performance and Payment Bonds on forms provide by the Department for the sums specified in the Contract. If n o sum is specified, the successful bidder shall comply with AS 36.25.010 ( 17). AS 36.25.010 states for contracts exceeding $100, 000 for the construction, alteration, or repair of a public building or public work of the state or a political subdivision of the state is awarded to a general or specialty contractor, the contractor shall furnish to the state or political subdivision of the state the following bonds, which become binding upon the award of the contract to that contractor: a performance bond with a corporate surety qualified to do business in the state, or at least two individual sureties who shall each justify in a sum equal to the amount of the bond; the amount of the performance bond shall be equivalent to the amount of the payment bond. (18).
54 Arizona Department of Transportation Standard Specifications 2001 Specifications for Road and Bridge Construction General Provisions Section 103 Award and Execution of Contract Subsection 103.07 Requirement of Contract Bonds specifies that the successful bidder shall furnish the DOT the following surety bond, which shall become binding upon the execution of the contract: a performance bond in the amount of 100 percent of the total contract amount, conditioned upon the faithful performance of the contract i n accordance with the plans, specifications and conditions thereof. Such bond shall be solely for the protection of the Department ( 19). Arkansas State Highway and Transportation Department 2003 Standard Specification for Highway Construction General Provisions Section 103 Award and Execution of Contract Subsection 103.05 Requirement of Performance Bonds, Payment Bonds, and Liability Insurance (a) Bonds specifies that at the time of execution of the Contract, the successful bidder shall furnish a surety P erformance bond or bonds in a sum equal to the full amount of the Contract and a surety Payment bond or bonds in a sum equal to 80 % of the full amount of the Contract (2 0 ). California Department of Transportation (Caltrans) 2001 Specifications for Road and Bridge Construction General Provisions Section 103 Award and Execution of Contract Subsection 3 1.02 Contract Bonds specifies that the successful bidder shall furnish the 2 bonds required by the State Contract Act. One bond shall secure the payment of the claims of laborers, mechanics or materialmen employed on the work under the contract, and the other bond shall guarantee the faithful performance of the contract. The bond forms will be furnished to the successful bidder by the Department. Except as ot herwise provided in Section 3248 of the Civil Code and Section 30154 of the Streets and Highways Code, the payment bond shall be in a sum
55 equal to the contract price and the performance bond shall be in a sum equal to at least one -half of the contract pric e ( 2 1 ). Colorado Standard Specifications General Provisions Award and Execution of Contract Subsection 103.03 Requirement of Contract Bonds specify that at the time of the execution of the Contract the successful bidder shall furnish a Contract Payment Bo nd and a Contract Performance Bond. Each bond shall be in a penal sum equal to the nearest integral one hundred dollars in excess of the sum of the original bid items plus all force account items specified in the project special provisions to be included in the payment and performance bonds ( 22). Connecticut D epartment of T ransportation Standard Specifications Division I General Requirements and Covenants Section 1.03 Award and Execution of Contract Subsection 1.03.04 Requirements of Performance Contract Bond and Payment Bond specifies that in conformance with Section 4941a of the Connecticut General Statutes, as revised (2 3 ), specifies that each contract exceeding one hundred thousand dollars in amount for the construction, alteration or repair of any public building or public work of the state or a municipality shall include a provision that the person to perform the contract shall furnish to the state or municipality on or before the award date, a bond in the amount of the contract which shall be bindi ng upon the award of the contract to that person, with a surety or sureties satisfactory to the officer awarding the contract, for the protection of persons supplying labor or materials in the prosecution of the work provided for in the contract for the us e of each such person, provided no such bond shall be required to be furnished: in relation to any general bid in which the total estimated cost of labor and materials under the contract with respect to which such general bid is submitted is less than one hundred thousand dollars; in relation to any sub-bid in which the total estimated cost of labor and materials under the contract with respect to which such sub -bid is submitted is less than one
56 hundred thousand dollars; or in relation to any general bid or sub -bid submitted by a consultant, as defined in section 4b 55. Any such bond furnished shall have as principal the name of the person awarded the contract (24). Delaware Department of Transportation 2001 Specifications for Road and Bridge Construction G eneral Provisions Section 103 Award and Execution of Contract Subsection 103.05 Performance and Payment Bonds specifies that simultaneous with the execution of the Contract, the successful bidder shall furnish a surety bond or bonds in a sum equal to 100 percent of the Contract price to the state ( 2 5 ). Georgia Department of Transportation Standard Specifications Award and Execution of Contract Subsection 103.05 Requirements of Contract Bonds specify that the penal sum of the Contract shall be defined as 12 0 percent of the Original Contract Amount. At the time of the execution of the Contract, and as a part thereof, the successful Bidder shall furnish Contract Bonds as specified: Georgia Resident Contractors shall furnish Performance and Payment Bonds as fol lows: Performance bond in the full penal sum of the Contract and payment bond in an amount equal to 110 percent of the full amount of the Contract. The aggregate amount of the bonds shall be 210 percent of the full penal sum of the Contract; NonResident C ontractor shall furnish Contract Bonds as follows: Performance bond in the full penal sum of the Contract, payment bond in the full penal sum of the Contract and tax bond in the amount of 10 percent of the full penal sum of the Contract. The aggregate amou nt of the bonds shall be 210 percent of the full penal sum of the Contract. The tax bond shall represent the nonresident contractor bond required by the Revenue Department in accordance with Sections 48 13 30 through 4813 38 of the Official Code of Georgia Annotated ( 26).
57 Hawaii D epartment of T ransportation DOT/Federal Projects Special Provisions for 2005 Standard Specifications Subsection 103.05 Requirement of Contract Bond specifies that at the time of execution of t he contract, the successful bidder sh all fi l e a good and sufficient performance bond and a payment bond on the forms furnished by the Department conditioned for the full and faithful performance of the contract in accordance with the terms and intent thereof and for the prompt payment to all others for all labor and material furnished by them to the bidder and used I the prosecution of the work provided for in the contract. The bonds shall be of an amount equal to 100 percent of the amount of the contract price and include 5 percent of the con tract amount estimated to be required for extra work (27). Idaho Transportation Department Standard Specifications Subsection 103.04 Bond Requirements specifies that the lowest qualified bidder shall furnish a performance bond and a payment bond equal to t he full amount of the contract, in accordance with the applicable Idaho law. Idaho law states a performance bond in any amount to be fixed by the contracting body, but in no event less than eighty -five percent (85%) of the contract amount conditioned upon the faithful performance of the contract in accordance with the plans, specifications and conditions thereof. Said bond shall be solely for the protection of the public body awarding the contract. Comprehensive information about Idaho Performance Bonds St atute can be found at http://www3.state.id.us/cgi-bin/newidst?sctid=540190026.K (28). Illinois Department of Transportation requires that the performance bond must be for the entir e amount of the contract and issued by a firm authorized for the underwriting of at least that amount. It is possible to utilize more than one surety to bond a contract ( 29). Iowa Department of Transportation Standard Specifications Series 2009 General Requirements and Covenants Subsection 1103.05 Requirement of Contract Bond specifies that
58 o n all contracts, the Contractor shall file an acceptable bond in an amount no less than 100% of the contract sum with the Contracting Authority; however, the amount of the contract bond does not need to include the predetermined costs for incentives or bonuses shown on the contract ( 30). Kansas D epartment of T ransportation 2007 Standard Specifications General Clauses and Covenants Section 103 Award and Execution of Con tract Subsection 103.3 Contract Bond Requirements specifies to provide a contract bond on D. O. T. Form 282, for contract performance and payment of labor, materials, supplies and other items as specified in D.O. T. Form 282. Secure a penal sum that equals the contract amount (31). Maine D epartment of T ransportation Standard Specifications General Conditions Subsection 103.5.1 Performance and Payment Bonds complying with Section 110.2.1 Bonds which specifies that the Contractor shall provide signed, valid and enforceable Performance and Payments Bonds complying with the Contract. The bonds shall each be in the full Contract amount (32). Michigan Department of Transportation 2003 Standard Specifications Subsection 102.16 Requirements of Contract Bond specifies that the determined lowest Bidder shall furnish performance and lien bonds each for not less than 100 percent of the total contrac t price ( 33). Minnesota Department of Transportation 2005 Standard Specifications General Requirements and Covenants Subsection 1305 Requirement of Contract Bond (section 1103 Definition states that the contract bond is the approved form security executed by the Contractor and Surety or Sureties, guaranteeing complete execution of the Contract and all Supplemental Agreements pertaining thereto and the payment of all legal debts pertaining to construction of the project) specifies that the successful bidder shall furnish a pay ment bond equal to Contract amount as required by MN Statute .26 (3 4 ) which states that except as provided in sections
59 574.263 and 574.264 or if the amount of the contract is $75, 000 or less, a contract with a public body for the do ing of any public work is not valid unless the contractor gives a performance bond to the public body with whom the contractor entered into contract, for the use and benefit of the public body to complete the contract according to its terms, and conditione d on saving the public body harmless from all costs and charges that may accrue on account of completing the specified work. The penalty of each bond must not be less than the contract price ( 35). Mississippi Department of Transportation Standard Specifica tions General Provisions Section 103 Award and Execution of Contract Subsection 103.05 Requirement of Contract Bond specifies that the successful bidder shall execute and deliver to the Executive Director a contract bond or bonds in a sum equal to the full amount of the contract (36). Montana Department of Transportation Standard Specifications Division 100 Section 103 Award and Execution of Contract Subsection 103.06 Contract Bonds specifies an executed contract bond or bonds in a sum equal to the contract amount (37). New Jersey Department of Transportation Standard Specifications General Provisions Award and Execution of Contract Subsection 103.05 Performance Bond and Payment Bond specifies that the Bidder to whom the Contract has been awarded shall compl ete and deliver a Performance Bond and a Payment Bond on forms furnished by the Department. Each bond shall be the sum of not less than the Total Contract Price less the lump sum bid for the Pay Item Performance Bond and Payment Bond and shall be maintai ned by the Contractor until Acceptance ( 3 8 ). A New Mexico Department of Transportation Standard Specifications General Provisions Section 103 Award and Execution of Contract Subsection 103.6 Requirement of Contract Bonds specifies t he value of each bond sh all equal the Total Original Contract Amount (3 9 ).
60 New York Department of Transportation Standard Specifications General Provisions Section 103 Contract Award and Execution Subsection 10303 Contract Bonds A Faithful Performance Bond specifies that the Con tractor shall provide a bond in the form prescribed by the Commissioner, shown in 07 Sample Form of Faithful Performance Bond, with sufficient sureties, approved by the said Commissioner, guaranteeing that the Contractor will perform the work in accor dance with the terms of the contract documents, and that it will commence and complete the work within the time prescribed in the contract, and that it will provide against direct or indirect damages that shall be suffered or claimed on account of such c onstruction or improvement, during the time thereof, until the contract is accepted. The amount of the Faithful Performance Bond shall be 100% of the amount of the total contract bid price (40). Ohio Department of Transportation Standard Specifications Ge neral Provisions Section 103 Contract Award and Execution of Contract Subsection 103.05 Requirement of Contract Bond specifies furnishing Contract Bonds within 10 days after receiving notice of award. Furnish Contract Bonds to the Director on the prescribe d form, in the amount of the Departments estimate, and according to ORC 5525.16 (41) Contract Performance Bond and Payment Bond A states that before entering into a contract, the director of transportation shall require a contract performance bond and a p ayment bond with sufficient sureties, as follows: a contact performance bond in an amount equal to one hundred per cent of the estimated cost of the work, conditioned, among other things, that the contractor will perform the work upon the terms proposed, w ithin the time prescribed, and in accordance with the plans and specifications (42). South Carolina Department of Transportation Standard Specifications General Provisions Section 103 Contract Award and Execution of Contract Subsection 103.5 Bond Requir ement s
61 specifies that unless otherwise specified, provide the following bonds acceptable to the Department with the executed Contract: Performance and Indemnity Bond from a surety or sureties satisfactory to the Department in the full amount (100%) of the Contract bid amount, but in no case less than $10, 000.00 for the protection of the Department (4 3 ). South Dakota Department of Transportation 2004 Standard Specifications General Provisions Section 3 Award and Execution of Contract specifies that, at t he time of the execution of the contract, the successful bidder shall furnish a surety bond or bonds in a sum equal to the amount of the contract ( 4 4 ). Texas Department of Transportation Standard Specifications General Requirements and Covenants Section 3 Award and Execution of Contract Subsection 3.4 Execution of Contract B Bonds specify executed performance bond and payment bond in the full amount of the Contract price with powers of attorney (4 5 ). Washington Department of Transportation Standard Specifi cations General Requirements Section 1 0 3 Award and Execution of Contract Subsection 1 03.4 Contract Bond specifies that the successful bidder shall provide an executed Contract Bond for the full Contract amount (4 6 ). West Virginia Department of Transportation Standard Specifications General Requirements Section 1 03 Award and Execution of Contract Subsection 103.5 Requirement of Contract Bond specifies that the successful bidder shall execute and deliver the Division a good and sufficient surety or collater al bond payable to the State of West Virginia in the amount of 100 percent of the contract price (4 7 ). Wisconsin Department of Transportation Standard Specifications General Requirements and Covenants Section 103 Award and Execution of Contract Subsecti on 103.5 Contract Bond specifies that at the time of submitting the contract for execution by the department, deposit a
62 valid surety bond with the department in the amount designated on the bond form covering both performance and payment. Submit the contract bond on a department -furnished form (4 8 ). Wyoming Department of Transportation Standard Specifications General Requirements Section 103 Award and Execution of Contract Subsection 103.5 Performance Bond103.5.1 General specifies that when the contract is e xecuted, the department will require the successful bidder to provide a performance bond in a sum equal to the full amount of the contract (4 9 ).
63 REFERENCES 1 Minchin Jr., R. E. and Smith, G. R. Quality -Based Performance Rating of Contractor s Prequalificatio n and Bidding Purposes http://onlinepubs.trb.org/onlinepubs/nchrp/nchrp_w38.pdf Transportation Research Board. Accessed date July, 2009. 2 American Bar Association The Law of Performance Bonds 2009, 2nd Edition, pp 3 5, 22. 3 Luckey, J and Allman, A. Overview of the Miller Act Subcontractor Protection in Federal Projects http://stuff.mit.edu/afs/sipb.mit.edu/contrib/ wikileaks -crs/wikileaks -crs reports/97 751.pdf United States Congressional Research Service, American Law Division. Accessed date is November, 2009 4 American Bar Association The Law of Performance Bonds 1999, 1st Edition, pp 3 7 5 United States Congre ss House Committee on the Judiciary. Amending the Act of April 29, 1941, to authorize the waiving of the requirement of performance and payment bonds in connection with certain contracts entered into by the Secretary of Commerce 1970. 6 United States Genera l Accountability Office. Federal Contractors: Better Performance Information Needed to Support Agency Contract Award Decisions http://www.gao.gov/new.items/d09374.pdf. Accessed date August 2009. 7 Gransberg, D. and Reimer, C. NCHRP Synthesis 390: Performance -Base Contractor Prequalification http://onlinepubs.trb.org/onlinepubs/nchrp/nchrp_syn_390.pdf Trans portation Research Board Access ed date July, 2009. 8 Wisconsin Dep artment of Transportation Transportation Synthesis Report: Contractor Prequalification Quality -Based Ratin g http://on.dot.wi.gov/wisdotresearch/database/tsrs/tsrcontractorprequalification.pdf Accessed date July, 2009. 9 Thomas, H and Smith, G. NCHRP Synthesis 190: Criteria for Qualifying Contractors for Bidding Purpose s, http://books.google.com/books?id=zG SwPbizbwC&pg=PA19&lpg=PA19&dq=surety+and+dots+require+performance+bonds&so urce=bl&ots= pBlLQ2yG4&sig=TVC9hUdUWHWoDAqaKdrwWMidA U&hl=en&ei=0PTwSpC1C cXQ8QazwsD0CA&sa=X&oi=book_result&ct=result&resnum= 1&ved=0CBAQ6AEwAA#v=onepage&q=surety%20and%20dots%20require%20performan ce%20bonds&f=false Transportation Research Board. Accessed date November, 2009 10. The Surety and Fidelity Association of America Ohio HB 1 The State Budget Hurts Small and Emerging Contractors and Puts State Taxpayers and Laborers at Risk http://www.surety.org/GovRel/OhioHB1.pdf Accessed date October, 2009. 11. Surety Information Office. S tate Bonds Thresholds http://www.surety.org/GovRel/StateBondThresholds.pdf The Surety and Fidelity Association of America Accessed date October, 2009.
64 12. Associated Insurance Age ncy. The Importance of Surety Bonds in Construction, http://www.aiabonds.com/Misc/Default.aspx?EditId=65&ParentId=61 Accessed date November, 2009. 13. Surety Information Office. Contract Surety Bonds: Protecting Your Investment http://www.sio.org/html/protectinvest.html Accessed date October, 2009 14. Surety Information Office. 2007 Surety Market Report: Rising to the Occas ion http://www.sio.org/pdf/ENR_Market_2007.pdf Accessed date October, 2009 15. Associated Builders and Contractors. 2008 Surety Market Overview : The Value of Surety in Todays Challenging Constructi on Economy http://www.constructionexec.com/Issues/November_2008/Features2.aspx Accessed date October, 2009. 16. A labama Department of Transportation Standard Specifications for Highway Construction, http://www.dot.state.al.us/NR/rdonlyres/93B6BE77 D8B5 489B -AA00 DCA0731ADB87/0/2008_ALDOT_Spec_Book.pdf Accessed date November, 2009. 17. Alaska Department of Transportation and Public Facilities. Standard Specifications for Highway Construction, http://www.dot. state.ak.us/stwddes/dcsspecs/assets/pdf/hwyspecs/english/2004sshc.pdf Accessed date November, 2009. 18. Touch N Go/Bright Solutions Inc. Alaska Legal Resource Center: AS 36.25.010. Bonds of Contractors For Public Buildings or Works http://touchngo.com/lglcntr/akstats/STATUTES/Title36/Chapter25/Section010.htm Accessed date November, 2009. 19. A rizon a Department of Transportation. Standard Specifications for Road and Bridge Construction, http://www.azdot.gov/Highways/Cons tGrp/contractors/PDF/2008StandardSpecifications.pdf Accessed date November, 2009. 20. Arkansas State Highway and Transportation Department. Arkansas 2003 Standard Specification for Highway Construction, http://www.arkansashighways.com/standard_spec/2003/final100.pdf Accessed date November, 2009. 21. California Department of Transportation. Standard Specifications for Road and Bridge Construction, http://www.dot.ca.gov/ctjournal/images/2006_StdSpecs.pdf Accessed date November, 2009. 22. Colorado Department of Transportation. Standard Specifications for Road and Bridge Construction, http://www.dot.state.co.us/DesignSupport/Construction/2005SpecsBook/2005Book/2005Spe cBookWhole.pdf Accessed date November, 2009.
65 23. Connecticut Department of Transportation. St andard Specifications for Roads, Bridges and Incidental Construction, http://www.conndot.ct.gov/816/section_1.03.htm Accessed date November, 2009. 24. State of Connecticut General Assembly. Statu tes http://www.cga.ct.gov/2009/pub/chap847.htm#Sec49 41.htm Accessed date November, 2009. 25. Delaware Department of Transportation. Standard Specifications for Road and Bridge Construc tion http://www.deldot.gov/information/pubs_forms/manuals/standard_specifications/index.shtml Accessed date November, 2009. 26. Georgia Department of Tran sportation. Standard Specifications for Construction of Transportation Systems http://tom cat2.dot.state.ga.us/ContractsAdministration/uploads/DOT%202001.pdf Accessed date November, 2009. 27. Hawaii Transportation Department. DOT/FEDERAL Projects Special Provisions for 2005 Standard Specifications http://plonedev.hawaii.gov/dot/highways/specifications2005/provisions/projectspprov/sp_fed .htm Accessed date November, 2009. 28. Idaho Transportation Department. Standard Specifications for Highway Construction 2004, http://itd.idaho.gov/manuals/Downloads/spec%2704%27.htm Accessed date November, 2009. 29. Illinois Department of Transportation. Letting You Know http://www.dot.state.il.us/desenv/012006/nllyk.pdf Accessed date November, 2009. 30. Iowa Department of Transportation. Standard Specifications, Series 2009, http://www.iowadot.gov/erl/current/GS/content/1103.pdf Accessed date November, 2009. 31. Kansas Department of Transportation. 2007 Standard Specifications for Road and Bridge Construction, http://www.ksdot.org/burconsmain/specprov/2007SSDefault.asp Accessed date November, 2009. 32. M aine Department of Transportation. Standard Specifications Revision of December 2002 http://www.maine.gov/mdot/contractor -consultant information/ss_standard_specification_2002.php Accessed date November, 2009. 33. Michigan Department of Transportation. The 2003 Standard Speci fications for Construction, http://mdotwas1.mdot.state.mi.us/public/specbook/ Accessed date November, 2009. 34. Minnesota Department of Transportation. Mn/DOT S tandard Specifications for Const ruction: 2005 Spec Book Edition, http://www.dot.state.mn.us/pre letting/spec/index.html Accessed date November, 2009.
66 35. Minnesota Office of the Revisor of Statutes. 2009 Minnesota Statutes: 574.26 Contractors Bonds for Public Work https://www.revisor.mn.gov/statutes/?id=574.26&year=2009. Accessed date November, 2009. 36. Mississippi Department of Transportation. Standard Specifications for Road and Bridge Construction, http://www.gomdot.com/Divisions/Highways/Resources/Construction/pdf/2004StandardSpec s/sp ecbook.pdf Accessed date November, 2009. 37. Montana Department of Transportation. 2006 Standard Specifications http://www.mdt.mt.gov/business/contracting/standard_specs.shtml Accessed date November, 2009. 38. New Jersey Department of Transportation. Standard Specifications for Road and Bridge Construction, http:// www.state.nj.us/transportation/eng/specs/english/EnglishStandardSpecifications.htm#_ Toc530372331. Access date is November, 2009. 39. New Mexico Department of Transportation. Standard Specifications for Highway and Bridge Construction, http://www.nmshtd.state.nm.us/upload/images/Contracts_Unit/2007_Specs_for_Highway_an d_Bridge_Construction.pdf Accessed date November, 2009. 40. New York Depa rtment of Transportation. Standard Specifications (U.S. Customary Units) https://www.nysdot.gov/main/business -center/enginee ring/specifications/english -spec repository/espec -english -cd.pdf Accessed date November, 2009. 41. Ohio Department of Transportation. 2005 Construction and Material Specifications http://www2.dot.state.oh.us/construction/OCA/Specs/2005CMS/2005_ODOT_C&MS.htm Accessed date November, 2009 42. Lawriter LLC. 5525.16 Contract Performance Bond and Payment Bond, http://codes.ohio.gov/orc/5525.16. Accessed date November, 2009. 43. South Carolina Department of Transportation. 2007 Standard Specifications for Highway Construction, http://www. scdot.org/doing/StandardSpecifications/pdfs/2007_full_specbook.pdf Accessed date November, 2009. 44. South Dakota Department of Transportation. 2004 Standard Specifications for Roads and Bridges Construction, http://www.sddot.com/operations/docs/specbook04/3.pdf Accessed date November, 2009. 45. Texas Department of Transportation. Standard Specifications for Construction of Highways, Streets and Bridges ftp://ftp.dot.state.tx.us/pub/txdotinfo/des/specs/specbook.pdf Accessed date November, 2009.
67 46. Washington Department of Transportation. Standard Specifications for R oad, Bridge and Municipal Construction 2010 http://www.wsdot.wa.gov/publications/manuals/fulltext/M41 10/SS2010.pdf Accessed date November, 2009 47. West Virginia Division of Highways Standard Specifications for Roads and Bridge s http://www.wvdot.com/engineering/Specifications/2003/Y2KSpecB.pdf West Virgin ia Department of Transportation. Accessed date November, 2009. 48. Wisconsin Departmen t of Transportation. 2010 Standard Specifications http://roadwaystandards.dot.wi.gov/standards/stndspec/index.htm Accessed date November, 2009. 49. Wyoming Department of Transpo rtation. Standard Specifications for Road and Bridge Construction 2004, http://www.dot.state. wy.us/webdav/site/wydot/shared/Construction/2003%20Spec%20Book/ Standard_Specifications_for_Road_and_Bridge_Construction.pdf Accessed date November, 2009.
68 BIOGRAPHICAL SKETCH In 1982, Lorena Ofelia Myers was born in Punta Gorda Town, Belize. In 2001, sh e earned her Associates Degree in Physics and Math from St. Johns College Junior College She did a year of voluntary work from 2001 2002 and taught at Toledo Community College in Punta Gorda Town, Belize from 2002 2003. She embarked, in 2003, on her Bachelor of Science in Civil Engineering from the University of New Mexico where she earned it in 2003. While pursuing her bachelor degree, she became a n invited member of both the Kappa Mu Epsilon National Mathematics Honor Society and Chi Epsilon Civil Engineering Honor Society. In 2007, she became an engineeri ng intern after passing the FE. In February 2007, she was hired by Brasher and Lorenz, Inc. as a Staff Engineer where she worked as a design engineer. She worked with the civil engineering consulti ng firm for a year. In 2008, she began pursuing her Master of Engineering degree. Upon completion of the degree, Lorena is hoping to continue working as a design engineer. She marrie d a chemist, Dr. William Myers, in December 2008.