With the government constrained for funds, but US infrastructure requirements continuing to surge, public-private partnerships (P3) are emerging as a preferred model in public construction undertakings.
However, because the government retains ownership and ultimate control of the asset under construction, the model poses a whole new set of risks for contractors, said James Bly, managing director of subcontractor default insurance and surety analytics for Alliant’s Construction Services Group, in a report published in the online trade publication Construction Executive.
Bly explained that under the P3 set-up, the private sector finances the project and assumes operational risk, while the government retains ownership and prescribes standards for the construction and utilization of the project.
But because private contractors cannot execute a lien on P3 projects, surety is becoming a preferred option to manage risk in such undertakings.
One such surety is the performance bond with dispute resolution, which includes a liquidity feature and accelerated dispute resolution process. It also has a payment bond meant to protect subcontractors and suppliers. It is widely preferred for its benefit provisions for all project participants.
Bly said there is also currently a hybrid performance bond that carries a pay on demand feature that can be accessed for a percentage of the bond penalty. The rest of the bond is retained under the accelerated adjudication process, which guarantees a decision over a shorter period of time.
Likewise, conditional surety bonds applied to P3 projects benefit the design-build contractor by reducing its exposure to a liquidity crisis through measures such as paying for damages as prescribed by the penalty limit of the bond, financing the defaulted contractor, and hiring an alternative contractor.
Sureties are also emerging as “more sophisticated creditors,” Bly observed. The surety capacity is expanded, under new inter-creditor arrangements by clearly defining the first and second security positions for the banks and bonding companies.
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