Public Private Partnerships, or P3s, are aptly named because they truly mix aspects of public and private construction. But does that mean they are like public projects and subject to state or federal bonding requirement and prompt payment obligations? Or are they like private projects with lien rights?
In addition to not fitting neatly within the traditional public/private paradigm that we are familiar with, every P3 is unique. The relationships between the owner, concessionaire, various design professionals, contractors, subcontractors, and suppliers will vary from P3 to P3. This complicates things for trade subcontractors and suppliers who need to know and understand their rights. This article will briefly explore bonding requirements, lien rights, and prompt payment obligations on P3s and what subcontractors and suppliers will need to take into account before signing onto a P3 project.
Bond Requirements Vary from State to State
Almost every state requires payment and performance bonds on public projects. The bonds protect the owner from the defaults of its contractor and protect subcontractors and suppliers from nonpayment. But bonding requirements often differ between P3 projects and other public works.
Part of the rationale behind P3s is to relax the bureaucratic requirements traditionally associated with public works in an effort to incentivize private investors and contractors to participate in the project. It is for this reason that many P3 laws give discretion to the agency in charge of the project to determine if a bond will be required.
In Texas, for example, “an alternative form of security” is acceptable instead of a performance and payment bond if it is “sufficient to ensure proper performance of the agreement, and protect the authority and payment bond beneficiaries.” Tex. Transp. Code § 366.404. Arizona has a very similar statute for their transportation P3s. Colorado’s approach is to require a bond of at least 25% of the contract value for P3s, whereas the state requires a bond of at least 50% of the contract value for all other public projects. Colo. Rev. Stat. §§ 43-2-202 and 38-26-106.
There are states at the opposite end of the spectrum for bonding requirements, too, which do not relax the bond requirements for P3s compared to traditional public projects. North Carolina is one such state; it requires a payment bond for 100% of the construction value for P3s, which is the same as it is for regular public projects. N.C. Gen. Stat. § 143-128.1C.
Generally speaking, P3 projects are likely to offer some protection in the form of a bond. But as Texas and Arizona indicate, the protection may be different than what subcontractors and suppliers have come to expect on public projects. It is critical for subcontractors and suppliers to be aware of the bonding requirements on their particular projects when assessing the risk involved.
Lien Rights Depend on the Property Interest
A mechanics lien requires some private interest in the property for the property to serve as a potential avenue for recovery for unpaid services or supplies; a mechanics lien cannot attach to public property. Whether a P3 project is lienable, therefore, depends on whether or not there has been a transfer of property from the state, federal, or local government to the concessionaire.
It is not uncommon for the property to be leased to the concessionaire as part of the arrangement. If that is the case, and the state’s laws allow for liens to be recorded against leased properties, subcontractors and suppliers will have lien rights. Some lease agreements may even contain a clause that requires the leaseholder to pay their contractors and suppliers or face a penalty from the public entity property owner. This type of clause makes a lien a very effective remedy. But it is also possible that leaseholders and property owners will not take liens on leases seriously. The reason for this lack of concern is that at the end of the lease, the property will revert back to the public entity. Once this happens, lienors will not gain much by foreclosing on the lease.
The takeaway is twofold. First, it is important to know what lien rights are available in the state where the work is being performed. It is advantageous for a subcontractor or supplier to be able to place a lien on leased property, if such liens are permitted. Second, it is important to know who owns the property. It is, therefore, a good idea to review the underlying lease agreement if possible.
Prompt Payment Acts Vary from State to State
Another area of concern for subcontractors and suppliers are the rules dictating when they get paid. Prompt payment acts are common throughout the country. These statutes require owners and contractors to timely pay their downstream subcontractors and suppliers or face penalties. Unfortunately, there is no one-size-fits-all answer to how prompt payment obligations affect P3s.
There are two types of prompt payment acts: those that apply to public projects and those that apply to private projects. All states have some form of a public prompt payment act and over half of the states have a private prompt payment act. But not all prompt payment acts provide protection for subcontractors and suppliers who are too far removed from the owner of the project. There is the added complication during P3 projects where the “owner” is often ill-defined. The owner could be the private concessionaire or the government. Some P3s are considered private projects until complete, and only then do they become public projects.
With these concerns in mind, subcontractors and suppliers must know what prompt payment obligations exist in the states they are working in, and pay close attention to the distinctions between public and private acts. If it cannot be determined whether the owner of the P3 is a public or private entity, it is best to be conservative and assume that the prompt payment act more favorable to owners will apply.
P3 projects combine qualities associated with both public and private work. They are projects that benefit the public that are ultimately paid for by the public; they just include some level of private finance and control. For this reason, P3s are more often closer to public projects than private projects, and bond rights are more common than lien rights on P3s. But P3s add a layer of complication to the remedies typically available to subcontractors and suppliers that they would not otherwise encounter on entirely private or entirely public projects. For that reason, it is important for subcontractors and suppliers to be well informed on both their public and private remedies, as well as the specific details of the P3 relationship itself, before signing on.