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Minutes for SB55 - Committee on Commerce
Short Title
Public construction contracts and performance and payment bonds.
Minutes Content for Tue, Feb 7, 2017
Chairperson Lynn opened the hearing on SB 55 and requested Revisor Chuck Reimer to provide an overview of the bill.
Senator Bollier asked if this bill had been requested in the past. Mr. Reimer said he did not believe so but would need to check on it. He said he was not aware of any specific laws addressing public-private agreements in the public construction area.
Chairperson Lynn recognized Brad Miller, representing the American Subcontractors Association (ASA) and Midwest Crane and Rigging, LLC, who provided testimony in support of the bill. (Attachment 2)
Senator Holland thanked Mr. Miller for bringing the bill to the Committee and asked him to review the performance security funding required for a private contract versus a public-private project.
Chairperson Lynn asked Mr. Miller if he had been a victim of this issue. He responded he had not personally experienced a problem, but he was familiar, on a national basis, with other contractors for whom it had been a problem.
Chairperson Lynn inquired if other states have similar regulations in place. Mr. Miller responded affirmatively. Oklahoma was the first state to implement legislation of this nature. He indicated public-private partnerships (P3's) are relatively new to the industry in this area.
Chairperson Lynn recognized Nathan Buhrmester, Board Member of the Kansas City Chapter of the American Subcontractors Association and Surety Manager at Haas and Wilkerson Insurance in Fairway, Kansas. Mr. Buhrmester testified in support of the bill. (Attachment 3)
Surety bonds are a tool to help protect the owner of a project from delays, unacceptable performance, and to keep the completed work free of mechanics liens. When the owner is a private entity, the surety bonds would protect their investment as well as that of the lender financing the construction. When the owner is a public entity, such as federal, state, county or local municipality, the surety bond protects taxpayer money by ensuring the public entity will not be forced to pay for the mistakes of the contractor awarded the project.
While performance bonds guarantee that the contract/project will be completed per the specifications and on time, payment bonds guarantee that subcontractors and suppliers will be paid according to the terms of their contract with the prime contractor. Under Kansas law, all general contractors awarded projects that are publicly funded must provide a performance bond in order to protect taxpayer money. Payment bonds are also required under Kansas law for publicly funded projects due to the difficulties, and sometimes inability, of placing a mechanic's lien on public property.
Because public-private partnerships fall into a gray area due to the project being funded privately, there is currently no requirement for performance and payment bonds for these projects. The lack of this protection for subcontractors leaves them vulnerable to non-payment or slow payment. This can have an adverse effect on their ability to perform on this or other projects, creating a domino effect on other projects and on their internal operations, threatening their ability to pay their employees and pursue other work. Additionally, without this guarantee, many smaller subcontractors may forego pursuing this work or surcharging their bid to account for the added risk. This could result in fewer and less qualified subcontractors bidding the project at a higher cost.
This bill will be a benefit not only to the State of Kansas through guaranteeing the performance of the contract and the quality of the work performed, but also guaranteeing that the companies performing the work will be paid in accordance with the contract terms, encouraging more competition and lower overall costs for the project.
Senator Olson commented he has seen this issue occur in situations where payment is not made in a timely manner and the contractors experience higher interest costs and fees.
Senator Bollier asked if there was a downside to this bill. Mr. Buhrmester responded contractors who are not familiar with the bonding process may find it cumbersome at first, but the benefits are worth going through the bonding process.
Senator Faust-Goudeau asked how the passage of this bill would affect projects with State universities. Mr. Buhrmester said he could not speak directly for the universities, but public-private partnerships should increase competition because more subcontractors would be willing to bid the work, because of the assurance they would be paid.
Chairperson Lynn recognized Sheila Ohrenberg, Board Member of the Kansas City Chapter of the American Subcontractors Association and President of Sorella Group, Inc., who testified in support of the bill. She stated lack of payment protection shifts substantial risks to the subcontractors and suppliers. Typically, the contractors will extend large amounts of credit before submitting an invoice to the project's prime contractor. They have paid workers, suppliers and estimated taxes before knowing if payment is forthcoming. Such increased risk cannot be accepted without a cost by the business owner. If the risk is deemed too great, the most skilled and successful subcontractors may forego participation in the project. (Attachment 4)
Senator Holland asked if P3 opportunities generally involve public entities from the State on down and do not include federal projects. Ms. Ohrenberg responded this was correct, however, she was aware of a Wichita airport project which was partially State funded and partially Federal funded.
Chairperson Lynn recognized Larry Baer, General Counsel, The League of Kansas Municipalities, who testified in opposition to the bill. He said the bill would require that before a city could enter into a public-private agreement, the contractor would have to furnish a performance bond in an amount equal to the full contract price, if not required to under other provisions of law, and a payment bond in an amount equal to the full amount of the contract. These provisions would apply to any contract in an amount of $25,000 or more. (Attachment 5)
The League of Kansas Municipalities sees this requirement as an infringement upon cities' constitutional home rule right of local control and their ability to ensure that local issues and problems are handled at the level of government closest to the citizens they represent. Cities should have the discretion to review their needs, assess the situation and decide what, if any, protections are needed. Further, it appears that the bonding requirements in the bill do not allow a city to utilize "alternate security" forms as permitted in the Public Construction Contract Act. He also stated the $25,000 threshold is low, and it would seem logical and reasonable to set the threshold at a much more realistic amount.
Mr. Baer responded to several questions concerning bond requirements in statute.
Senator Suellentrop asked, if a level of bonding could be agreed upon between the conferees, would the cities support the bill. Mr. Baer responded affirmatively and indicated he was working with the proponents to determine a reasonable threshold.
Chairperson Lynn closed the hearing on SB 55 and encouraged the parties to work together toward a resolution.
Chairperson Lynn adjourned the meeting at 9:07 a.m. The next meeting is scheduled for February 8, 2017.
