Performance Bond Benefit Cost Analysis

Transcription

1 Paper No Performance Bond Benefit Cost Analysis by Lorena Myers (Corresponding Author) Department of Civil and Coastal Engineering University of Florida Weil Hall P.O. Box 0 Gainesville, FL 0 Telephone #: () Fax #: () lorenagut@gmail.com and Fazil T. Najafi, Ph.D. Professor Department of Civil and Coastal Engineering University of Florida Weil Hall P.O. Box 0 Gainesville, FL 0 Telephone #: () Fax #: () fnaja@ce.ufl.edu Submission Date: November, 0 Word Count: Abstract Text (excluding Abstract), Tables ( x 0), 000 Figures ( x 0) 0 TOTAL WORD COUNT:,

2 Myers and Najafi ABSTRACT A performance bond provides the assurance that an awarded construction project will be satisfactorily completed in the event that the contractor is unable to complete the project as agreed and the contract is terminated. Passed into law in the late 00s, performance bonds protect against financial losses. The ability of contractors to provide performance bond has mistakenly been assumed as a guarantee that contractors will perform well on the projects they are awarded. Indications are that there is a need to evaluate the benefits and the costs of using performance bonds. This paper takes a look at the benefitcost of performance bonds on a national basis. In order to perform the analysis, state construction project data was collected for contract awards from September 00 to September 00. The results of the analysis suggest that states that had a small number of defaults, or none at all, did not benefit from having performance bonds, while those states that had numerous defaults did benefit. In conclusion, the results suggest that performance bonds are beneficial to states that experience a large number of defaults. INTRODUCTION Background Using bonds alone does not guarantee that a contractor can perform the work. Bonds protect against financial losses but cannot predict delays and public inconveniences. Whether performance bonds can be replaced by a performance based prequalification system is a research topic worth investigating (). So far, research has suggests that prequalification had not predicted delays, eliminated public inconvenience, or guaranteed that contractors could perform work. From the prediction standpoint, the value added by a performance based prequalification system is that State Departments of Transportation (DOTs) would be putting to further use the contractor performance information collected by the agencies (). While the current practice of states is to use performance bonds, an appropriate goal would be to transition to a performance based qualification practice to help ensure completion of projects. To consider transitioning from performance bonds to performance based qualification, the benefits and costs of performance bonds need to be evaluated. Research Objectives and Approach The objectives are as follows:. Search literature on current topic of performance bond.. Collect contract awards data (name of contractor, type of project, cost of awarded project and whether the contractor defaulted on the project) from September 00 to September 00 from all states.. For states with defaulted projects, obtain information about the percent complete of each project at the time of default.. Obtain an estimate of surety performance bond premium cost for projects.. Categorize projects based on performance bond premium thresholds.. Apply bond premium to defaulted and all projects.. Analyze the type and range of projects experiencing the most defaults to see if there is any correlation.

3 Myers and Najafi Quantify and analyze the possible DOTs benefittocost using the default information by assuming 0 percent of total defaulted project cost is the amount the surety spent for defaulted projects completion for selected states (presented later in Table ).. Quantify and analyze the total cost of defaulted projects compared to cost of all projects (presented later in Table ).. Conclude whether the benefit/cost ratio supports the use of performance bonds.. Make suggestions for future research work. The research approach is based on the relationship between performance bond and default. The literature review section provides more insight into this relationship. LITERATURE REVIEW From a historical perspective, 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. In response to the financial panic of, the Heard Act was enacted (), by the United States (U.S.) Congress, and passed in. The Heard Act granted a right of action in the name of the U.S. against a prime contractor and its surety for unpaid labor and materials used in the prosecution of contract work. In 0, Congress amended the Heard Act by adding the phrase labor or materials used in construction of any public building or public work. Noting deficiencies, Congress repealed the Heard Act (). The Miller Act, enacted in, effectively restated and recodified what had been known as the Heard Act (). The Miller Act provides the following: before any contract for 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 (), both performance and payment bonds for certain contracts in excess of $, 000, since revised to $0, 000 (), which shall become binding upon the award of the contract. A contractor shall furnish both performance and payment bonds, with a surety or sureties, satisfactory to the officer awarding such contract and in such amount as he shall deem adequate, for the protection of the U.S. (). The original act did not permit waiver of the bonding requirements, but certain decisions of the Attorney General and the Comptroller General in the 0s, coupled with the advent of World War II, highlighted problems with the statute as written and led to a amendment allowing waivers in certain circumstances. The problems leading to the amendment related to: the definition of public work ; defense contracts whose number and dollar value were increasing exponentially upon the start of the war; and the surety industry struggling to keep up (). Congress authorized the waiving of the requirement of performance and payment bonds in connection with certain contracts entered into by the Secretary of Commerce (). The waiver authority under the Miller Act was originally added to the statute, in, in order to avoid delays on defense contracts due to problems in the surety industry during World War II. These waiver provisions were expanded, in, to authorize waiver of bonding requirements on costtype contracts awarded by the Department of Defense agencies (). In, 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 (). The Miller Act was amended again in 0 to add waiver authority for the Secretary of Transportation in connection with ship construction and repair ().

4 Myers and Najafi To understand how performance bonds work, it is important to look at how a bond is formulated. Performance bonds are contracts that create tripartite relationships. There is the principal (typically the general contractor) who has assumed a contractual undertaking. There is the obligee (typically the project owner, in this case DOTs) that is due the benefits of the principal s performance. And there is the surety who provides the performance bond that secondarily guarantees to the obligee performance of the principal s contractual undertaking. Performance bonds ensure that, although unfavorable circumstances may arise, the project will be completed (). Performance bond coverage comes into effect when it is proven that the contractor has indeed legally defaulted. Therefore, to analyze the benefitcost of performance bonds, it is necessary to take a look at the number of defaults that have occurred during the analysis period of this study. In order to do so, it is necessary to clarify what is meant by the word default. In 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 obligee s only option (). Looking at the current challenges facing DOTs with respect to contract awards to defaulting contractors, there is a need to consider putting checks and balances in place. The United States General Accountability Office (GAO) released a report in April 00 that mentions contractors, who have defaulted on previous projects, receiving bid awards for which they qualify. For example, a $0 million Army munitions contract was awarded to a contractor that had previously been terminated for default on several different contracts. Subsequently this same contractor defaulted under that contract. The contracting officer stated that this information, if available, would have factored into the award decision. This recent awarding of contracts to defaulted contractors highlights the need for information on contract terminations when making contracting decisions. With the government relying on many of the same contractors to provide goods and services across agencies, the need to share information, on a contractor s past performance, is critical (). The use of contractor project performance evaluations encompasses the three major aspects of project success: cost, time and quality. Ensuring quality of the final product is ultimately a major reason for implementing performancebased contractor prequalification; its impact on the DOTs quality management program cannot be ignored. Linking a contractor s past performance to the need for viable and trustworthy contractor quality control programs is possible; even in an environment in which the DOTs must give up much of the traditional control it have in project delivery (). For additional details not included here see Gransberg and Reimer (). The Ontario Ministry of Transportation s (MTO s) performancebased contractor prequalification program is perhaps the most interesting example. Started in the late 0 s, it not only provides an incentive for contractors to perform well but also allows the agency to accrue a tangible monetary benefit. With an annual construction program of roughly USD$. billion and average Ontario performance/payment bond costs of % of contract cost, the estimated savings to the province is roughly USD$ million per year in bond costs (). The current trend is to transition from performance bonds to a performance contractor prequalification based system, such as the one MTO has been using for over 0 years. Seven states (Connecticut, Maryland, Minnesota, Missouri, Utah, Virginia and Wisconsin) are already using an indexing system to rate or rank contractors (). Table below summarizes a 00 survey that showed most states ( out of that responded) used contractor prequalification (). For this research being reported herein, 0 states are evaluated (See the Methodology: Data Collection section for more details on how states are selected). Out of the states listed in Table, are included in this research: Alaska, Colorado, Connecticut, Delaware, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Maine, Michigan, Minnesota, Montana,

5 Myers and Najafi New Jersey, New York, South Carolina, South Dakota, Texas, Washington, West Virginia, Wisconsin and Wyoming. Delaware, Maine, Minnesota, Montana, New York and South Dakota do not have a prequalification system (). For additional details not included here see Minchin and Smith (). The NCHRP Synthesis 0 reports that all states require a bond or the equivalent of a bond at some stage of the qualification process (). The Surety and Fidelity Association of America (SFAA), a trade association of 0 companies that are licensed to provide surety and fidelity bonds, also reports that all 0 states and the District of Columbia require surety bonds on state and local public works projects (). Table State Practices for Prequalification for Contract Awards for States (00) No. State Prequalification No. State No Prequalification Alaska Yes 0 Delaware Yes Colorado Yes Maryland Yes Connecticut Yes Maine Yes Florida Yes Minnesota Yes Georgia Yes Missouri Yes Idaho Yes Montana Yes Illinois Yes New York Yes Indiana Yes South Dakota Yes Iowa Yes Kansas Yes Kentucky Yes Louisiana Yes Massachusetts Yes Maine Yes New Hampshire Yes New Jersey Yes North Carolina Yes North Dakota Yes Nevada Yes 0 Pennsylvania Yes South Carolina Yes Texas Yes Utah Yes Vermont Yes Virginia Yes Washington Yes West Virginia Yes Wisconsin Yes Wyoming Yes Although both reports mention all states requiring bonds, it is important to take a look at the performance bond practices of the 0 states. Table below shows the performance bond threshold for each state. Above the specified threshold, a performance bond is required. Delaware, Idaho, Ohio, and West Virginia have no thresholds (). Another source of the performance bond thresholds and requirements is the standard specifications of each state. States requiring a performance bond equivalent to 0 percent of the contract amount are noted.

6 Myers and Najafi 0 0 An interesting question is whether the performance bond is always 0 percent of the contract amount. Seven states gave affirmative responses to the following NCHRP Synthesis 0 survey question ( on pg. ) Has your organization ever required less than the full contract amount to be bonded? (). The methodology used to evaluate the benefitcost of performance bond is discussed in the next section. Table State Bond Thresholds as Reported by SFAA for 0 Selected States No. State Threshold No. State Threshold Alabama* $0, 000 Michigan* $0, 000 Alaska $0, 000 Minnesota* $, 000 Arizona* $0, 000 Mississippi* $, 000 Arkansas* $0, 000 Montana* $0, 000 California $0, New Jersey* $0, 000 Colorado $0, 000 New Mexico* $, 000 Connecticut* $0, 000 New York* $0, 000 Delaware* None Ohio* None Georgia* $0, 000 South Carolina* $0, 000 Hawaii* $, 000 South Dakota* $0, 000 Idaho* None Texas* $0, 000 Illinois* $0, 000 Washington* $, 000 Iowa* $, 000 West Virginia* None Kansas* $0, 000 Wisconsin $, 000 Maine* $, Wyoming* $, 00 *Requires bond equivalent to 0% of contract amount (). METHODOLOGY Data Collection This section discusses how the research data was collected from the DOTs. Using a questionnaire to get information from the DOTs seemed like a good idea. Raw data was requested instead to minimize errors that could arise from misinterpretation of terminologies. The DOTs were contacted via , phone or postal mail. Data requested, from September 00 to September 00, for all awarded public transportation construction contracts, included the name of the contractor, type of project, the amount awarded for the project, and whether the contractor defaulted on the project. One state did not respond to the request. Others responded but did not provide the data. There were some states that responded and provided data but not in the entirety (four parts) requested. While collecting the data, some DOTs (Arizona DOT) provided the data without a processing charge, since the research is for academic purposes. Others (Texas and California) responded quickly and the information they provided exceeded that which was requested. Some charged for processing the data based on the volume of information being requested. If the requested volume was below a threshold, there was no processing fee. For some states, simply sending an request was not sufficient. An official request, via a hard copy of the form, had to be made to the DOT based on the Public Record Access. Some states saw requesting this type of information as sensitive and were a little reluctant to release it, while others such as Alaska, California, Colorado, Georgia, Idaho, Mississippi, New Jersey and Texas saw the information requested as public. Colorado, Georgia, Idaho, Mississippi and New Jersey all have their contract information accessible on their website. All

7 Myers and Najafi 0 DOTs required a written request for information. The subsection, that follows, discusses data organization for analysis. Data Organization In the public work sector that is specifically controlled by the DOTs, projects can be federal, state or combined federal and state. Other categories could also include bridges, electrical, maintenance, clearing, roadway resurfacing, roadway rehabilitation, and, from the MTO s model: road, structures, electrical, structural coating, and general maintenance (). The data could be categorized in many different ways. Each state has its own data structure of projects. This was evident from the data files obtained. A state, having its highway road data categorized into bridge or not, questioned the data type being requested in the . That state did not include bridges in the data based on the response given to exclude bridges. Subsequent states with that question were asked to include bridges. When collecting the data, it was inevitable that the data would be categorized. How? That is the difficult question, that led to other questions (Should a regression analysis be done? If so, which way would be best to categorize the data?), that had to be answered. The objective was to simplify the analysis. The research time frame and analyzing 0 states led to the BenefitCost Ratio analysis; which represents economic evaluations of alternative resource use and measure costs where outcomes can be measured in terms of their monetary values (). 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 percent (). Likewise, the SFAA reports the cost of the performance bond onetime premium as typically ranging from half to two percent of the contract amount. The information gathered from SFAA places the projects into four categories as shown in Table below, in terms of performance bond premium (). Table Onetime Performance Bond Premium as Reported by SFAA Contract Amount Performance Bond Premium Project Size Category Percentage $0, 000 $, 00 to $, 00 < $ Million.0% $ Million $, 00 to $, 00 $ Million to < $ Million.% $ Million $, 0 to $, 000 $ Million to < $0 Million 0.% 0 $0 Million $0, to $, 000 > $0 Million 0.% Table shows performance bond premium for various contract amounts. The upper limit of the bond category with corresponding monetary value is use to estimate a percentage. The contract amount and performance bond premium (column and respectively) were given in the surety report. Values in the Project Size Category (column ) are added in order to calculate bond premium cost for all projects (), and Percentage values (column ) are calculated using the upper limit performance bond premium (column ) divided by the contract amount (column ) and multiplied by 0 percent. An alternative to establish percentages, that are not too different from those in Table, is by dividing the averages of premiums (column ) by the contract amounts (column ), yielding results of.0 %,.0 %, 0. %, and 0. %. The cost of a performance bond premium will vary because

8 Myers and Najafi it is dependent on the size, type of the project and the contractor s bonding capacity (). Note in this same column (Percentage), the percentage decreases as the size of the project increases. An explanation follows: It is not uncommon in today s construction environment for projects to exceed $00 million or even $ billion. Many sureties prefer to spread their risk by having project owners break up a large megaproject into multiple large projects (to the extent they can be broken up), notes Mike Cusack, senior vice president, managing director and operations board member, Aon Construction Services Group. Bill Marino, chairman and CEO, Allied North America, says, From the perspective of the owner, joint ventures and the corresponding cosurety structure necessary to support the larger bond penal sums, are beneficial. In the event that one of the joint venture s contracting entities fails, it becomes the responsibility of their partners to assume their contractual responsibility (). This seems to indicate that sureties have analyzed how to provide the coverage necessary to provide performance bonding in an economical way while minimizing problems that would typically arise. Another organization of members, founded in, dedicated to providing the most productive and costeffective public service is National Council for PublicPrivate Partnerships (NCPPP). These contractual arrangements, between government entities and private companies for the delivery of services or facilities, are used for water/wasterwater, transportation, urban development, and delivery of social services, to name a few areas of application. The average American city works with private partners to perform out of municipal services. Governments traditionally realize cost savings of 0 to 0 percent when the private sector is involved in providing services (). Some DOTs have PPPs incorporated in their transportation program. For example, Washington Department of Transportation (WSDOT) has a Transportation Innovative Partnership (TIP) program, which was authorized by the legislature in 00 (). Another DOT with a similar program is the Texas Department of Transportation. The number of DOTs having PPPs programs needs to be research. The upcoming section provides and discusses the results of the methodology use to analyze the benefitcost of performance bonding. ANALYSIS, RESULTS AND DISCUSSION Analysis In order to determine the value to the agency of using performance bonds during the period September 00 to September 00, an analysis is done of the benefitcost of having performance bonds in four states with defaulted projects (identified in more detail later). Added information, also presented later, includes the percentage complete of projects when defaulted as well as the percentage of defaulted contractors to the total number of contractors. To begin the analysis, the percentage cost of the performance premium (Table, column ) is applied to all 0 states (Table ), during the twoyear analysis period (). Table below shows the original cost of all projects, the estimated cost of bond premium to the surety, the total number of projects and defaulted projects for each of the 0 states. The total cost of all projects, for the last two years, is $, 0,, 00 and total estimated performance bond premium is $, 000, 000 or an equivalent of. percent of the total project costs. MTO s percentage is (). Note, in the last two columns of Table, a total of projects were defaulted out of the, 0 projects awarded.

9 Myers and Najafi Table Project Data Collected for 0 States during No. State Original Cost Bond Premium Total Total Defaulted (estimated using Projects Projects Table percentage Alabama $,, 0,. $,,. Alaska $0,,. $,, 0. 0 Arizona $, 00,, 0. $, 0,. 0 0 Arkansas $,,. $,,. 0 0 California $,, 000,. $,,. 0 Colorado $, 0, 0.0 $, 0,. 0 Connecticut $,, 0,.0 $,, 0. 0 Delaware $,,. $,,. 0 0 Georgia $,,, 0. $, 0,. Hawaii $0,,. $,, 0. 0 Idaho $,,. $, 0, 0.0 Illinois $, 0, 00,. $,, 0. 0 Iowa $,,,. $,,. 0 Kansas $,, 0, 0. $,,. 0 Maine $,,, 0. $,, Michigan $, 0,,. $, 0,. 0 0 Minnesota $,,,. $, 0, 0. 0 Mississippi $,,,. $,,. Montana $, 0, 00.0 $,,. 0 0 New Jersey $,,,. $,, 0. 0 New Mexico $,. $,, 0. 0 New York $,,,. $,,.00 0 Ohio $,, 0,. $,,.00 0 South Carolina $,, 0,. $,, 0.0 South Dakota $,, 0. $,,. 0 Texas $,,,.0 $,,. Washington $,,, 0. $,,. 0 0 West Virginia $,, 0,. $,,. 0 Wisconsin $,,, 0. $,, Wyoming $,,. $, 0,. 0 0 Total $, 0,,. $,,., 0 Table below provides information on defaulted contracts (contracts include the state s criteria for defaults). The contractor (for privacy, the name is replaced with an alphabetic character), the type of project defaulted, the contract award amount and the approximate complete of the project at the time of default expressed as a percentage, are listed. The type of project, experiencing the highest number of defaults, is construction for roadway widening. Also, the highest number of defaults that occurred from any one contractor, Contractor D, is. The source of the contract amount (column ) was either directly from the DOT or the state s website. For the purposes of this research, projects that qualify as defaulted projects refer to roadway construction project that also qualify under the state's definition of default. Based on this, four states out of the six qualified as candidates for the benefitcost analysis.

10 Myers and Najafi Table Defaulted Project Data Identified by Contractor from States during Approximate Complete at No Contractor Type of Project Contract Amount Default (%) A Grade, Drainage, $,, Pavement, Bridge and Signals A Bridge Replacement (bridge $, culvert) and Approaches A Removal of Structures at the $0, Salvage Yard B Widening (W) $, 0, B Bridge Replacement and $, 000, Approaches B Relocation $,, C Bridge Approaches 0 D State Route Surfacing $, D State Route Surfacing $, 0, D Widening (W) $,, D Widening (W) $,,.00 0 D Widening (W) $,,.00 0 D Widening (W) $0,,.00 0 D Widening (W) $,,.00 D Widening (W) $,, 0.00 D Widening (W) $,,.00 0 D Widening (W) $,,.00 0 D Widening (W) $,, D State Route Surfacing $,, D State Route Surfacing $,,.00 D Bridge Replacement $,,.00 0 D Bridge Replacement $,,.00 0 D New Construction $, 0,.00 D Interchange Reconstruction $,,.00 E Widening (W) $,,.00 E Widening (W) $,,.00 F Concrete Sidewalks and Signage $,.00 0 F Minor Excavation and Paving $0,.00 0 Pathway Building 0 Bridge Painting G Traffic Signals $,, 0.00 H Widening (W) $, 0,.00 I Sidewalk $,. J Widening (W) $,,. J Intersection Improvements $, 0,.0 J Intersection Improvements $,,. K Wastewater Treatment $, Indicates incomplete research

11 Myers and Najafi 0 0 Table shows default project data for four states. The total number of defaulted contractors; contractors; and projects; as well as percentage of defaulted contractors; are listed. The percentage values (column ) are derived using the total number of defaulted contractors (column ) divided by the total number of contractors (column ) and multiplied by 0 percent. For Alabama, three contractors (two contractors defaulted projects each and one contractor project) defaulted on projects (refer to Table above). Looking at Georgia, two contractors (one contractor defaulted projects and the other projects) defaulted on projects. For Idaho, one contractor defaulted on projects. Finally, South Carolina had four contractors (three contractors defaulted project each and one contractor projects) defaulted on projects. It is not uncommon for one contractor to have many projects. Alabama s highest number of contract awards to one contractor is projects; while Georgia, Idaho and South Carolina s are, and respectively. Table Defaulted Project Data with Percent of Defaulted Contractors during State Total Number of % of Total Number Total number Defaulting Total Contractors of Projects of Contractors Contractors Who Defaulted Alabama. Georgia.0 Idaho. South Carolina.0 In developing Table below, the total cost of defaulted projects for each of the four states (column ) is divided by half to get an estimated amount (column ), representing a benefit to the DOT; assuming the surety pays this amount to complete projects to simplify the analysis. SFAA reports that sureties have paid more than $ billion on contractor defaults since. Half of that was paid between 00 and 00 (0). The total performance bond premium cost for the defaulted projects () and the Benefit/Cost (B/C) ratio of performance bonds are also listed in Table. The B/C ratio (column ) is obtained by dividing the values in the 0% of Total Cost of Defaulted Projects (column ), which is a benefit to the state, by the values in the Total Cost of Defaulted Projects Bond Premiums (column ), which is a cost to the state. Table Defaulted Project Data BenefitCost Analysis for Selected States during Total Cost of 0% of Total Cost Total Cost of Defaulted Projects State of Defaulted Defaulted Projects Bond Premiums Projects (B) (C) Benefit/Cost (B/C) Ratio for State Alabama $,, 0. 0 $,,.0 $,,. 0.0 Georgia $,, 0.00 $,,.00 $, 0,.. Idaho $0,.00 $,.00 $, 0, South Carolina $,,. $,,. $,,. 0. Table below shows the total number of projects (refer to Table ), total cost of projects, total cost of defaulted projects, and the percentage defaulting cost. The value of Percentage Defaulting Cost (column ) is obtained by dividing the value of Total Cost of Defaulted Projects (column ) by the value of Total Cost of Projects (column ) and multiplying by a 0 percent.

12 Myers and Najafi Table Defaulted Project Data with Percentage Defaulting Cost during Total Total Total Cost Number Total Number of of State of Cost of Defaulted Defaulted Projects Projects Projects Projects Percentage Defaulting Cost (%) Alabama $,, 0,. $,, Georgia $,,, 0. $,, Idaho $,,. $0, South Carolina $, 0, 00,. $,,. 0. Results and Discussion From the Table results, Georgia is the only state where the benefits outweigh the costs. In the other three states, the sureties made a profit. Sureties are in business for the money and 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, especially at the expense of the DOTs that have few or no defaults, is simply staggering. It shows that there is a need to seriously think about replacing performance bonds with another system, such as the Ontario Model in Synthesis 0 (). To summarize Tables and, Alabama s B/C ratio is 0.0 and percentage defaulting cost is.. Georgia s B/C ratio is. and percentage defaulting cost is.. Idaho s B/C ratio is 0.0 and percentage defaulting cost is 0.0. South Carolina s B/C ratio is 0. and percentage defaulting cost is 0.. When benefits exceed the costs, the ratio is greater than, and the use of performance bonds can be viewed as being beneficial. While Table gives B/C ratios for the states; it is a simple matter to calculate B/C ratios from the sureties' viewpoint as they are the inverse of the states' B/C ratios. A state s B/C of 0.0 translates to a surety B/C of.0. In other words, if benefits to the state are / 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 (AL), 0. (GA), (ID), and.0 (SC). Of course, additional administrative management costs to the surety for finishing defaults projects decrease the surety B/C somewhat. The results, therefore, indicate that during the year analysis period, Alabama, Idaho and South Carolina s requirements, for performance bonding (which includes the state s criteria for defaulting), are not beneficial. For Georgia, the use of performance bonds is beneficial primarily because that state had a relatively large number of defaults for some unidentified reason. CONCLUSIONS The BenefitCost (B/C) analysis, because of the simplicity it provides in getting a ball park figure in a short time frame, is useful to compare the alternatives of having performance bonds to not having any at all. The September 00 to September 00 analysis period illustrates that the use of performance bonding, in Alabama, Idaho, and South Carolina, is not beneficial. Also, for the remaining states, the use, of performance bonds, is not beneficial. For Georgia, the only state where this is true, the B/C analysis indicates having performance bonds as beneficial. However, the conclusion should not be made that Georgia is a winner. Certainly, having a relatively large number of defaulted projects is not the state's goal. In addition, sureties might well raise the cost of premiums on Georgia s projects based on that state s recent history. A B/C ratio greater than can be viewed as the use of performance bonds having been beneficial. Although no specific B/C ratio is established, states that have very low or high B/C ratios

13 Myers and Najafi are encouraged to evaluate their performance bond criteria and take a look at the practices of those states with B/Cs that are a little over. A very high B/C indicates that many defaults are occurring. A very low B/C indicates little or no defaults are occurring therefore the use of performance bonding should be evaluated. The decision of whether to use performance bonds involves risk. States, therefore, should evaluate the risks involved with projects and make a decision based on that as to whether performance bonds would be required or not. Although no analysis is done on some other aspects, it is interesting to note from the data collected that the project type experiencing the highest number of defaults is roadway widening ( out of ), and the most projects defaulted by one contactor is. There is reason to believe that the contractor probably had a good past performance record and probably went bankrupt all at once resulting in numerous defaulted projects. States that experience defaults benefit from having performance bonding. If little or no defaults occur in a state, no benefit is seen. In light of this, this research is not suggesting eliminating performance bonding. DOTs are encouraged to evaluate the risks involved with using or not using performance bonds for projects and make a decision based on that. FUTURE WORK For the benefitcost of performance bonds to be more fully and better analyzed, more detailed information of the benefits and costs to the DOT, contractor and surety need to be collected. Categorizing projects into, for example, duration of projects, types of projects (e.g. roadway surfacing roadway preventative maintenance, and so on), types of funding (federal, state or combined), would help to give a clearer picture of which projects are problematic and would require performance bonding. Future data collection and analysis efforts could also: ) identify contractors who go bankrupt under one name, later resurface under a new name for business, and are subsequently awarded projects after having a history of poor performance; and ) evaluate defaults between the years 00 and 00, since the surety industry lost half of the total money spent on defaults since during that time period (0); ) determine the actual cost of dealing with surety, delays, and so on over and beyond what the contract may have cost and in comparison to the bond cost; ) determine the costeffectiveness of these bonds which are required by state law; ) investigate the applicability to PublicPrivate Partnerships and the number of DOTs having PPPs programs; ) how prequalification should be sufficient and is a lot cheaper than performance bonding. In addition, suggestions for future research for performance bond costeffectiveness analysis found in Synthesis 0 include: ) quantifying the cost of performance bonding on a national basis and compare it with a rigorous performancebased contractor prequalification process based on the Ontario Model; ) analyzing contractor default rates on a statebystate basis and seek to identify those types of public transportation projects that were at the most and least risk of default; and ) developing an algorithm to adjust a good contractor s performance bonding requirements in the event the DOT choose to implement the algorithm (). ACKNOWLEDGMENTS The technical support of the DOTs is recognized for providing the necessary data to make the work possible. Also acknowledged is the support of Mr. Peter Kopac, former Federal Highway Administration official, for providing insight, direction and an alternative analytical approach to data interpretation; Dr. Mang Tia, University of Florida Professor, for guiding and encouraging me to

14 Myers and Najafi 0 0 keep focus on what is important; and Dr. William Myers and those who provided help in small, but significant ways. REFERENCES. Gransberg, D. and Reimer, C. NCHRP Synthesis 0: PerformanceBase Contractor Prequalification, Transportation Research Board. Accessed date July, 00.. Minchin Jr., R. E. and Smith, G. R. QualityBased Performance Rating of Contractors Prequalification and Bidding Purposes, Transportation Research Board. Accessed date July, 00.. American Bar Association. The Law of Performance Bonds. Chicago, Illinois. 00, nd Edition, pp.,.. Luckey, J. and Allman, A. Overview of the Miller Act Subcontractor Protection in Federal Projects. United States Congressional Research Service, American Law Division. Accessed date November, 00.. Wittie, P.H. Unpaid Ship Repair Subcontractors and Miller Act Waivers: Time for a Change?, The Procurement Lawyer, Spring 00, at, American Bar Association. Accessed date January, 0.. American Bar Association. The Law of Performance Bonds. Chicago, Illinois., st Edition, pp.,.. United States Congress House Committee on the Judiciary. Amending the Act of April,, to authorize the waiving of the requirement of performance and payment bonds in connection with certain contracts entered into by the Secretary of Commerce. Washington, D.C. 0. p.. United States General Accountability Office. Federal Contractors: Better Performance Information Needed to Support Agency Contract Award Decisions. Accessed date August, 00.. Wisconsin Department of Transportation. Transportation Synthesis Report: Contractor Prequalification QualityBased Rating, Accessed date July, 00.. Thomas, H. and Smith, G. NCHRP Synthesis 0: Criteria for Qualifying Contractors for Bidding Purposes, SwPbizbwC&pg=PA&lpg=PA&dq=surety+and+dots+require+performance+bonds&so urce=bl&ots=pbllqyg&sig=tvchuduwhwodaqakdrwwmida U&hl=en&ei=0PTwSpCCcXQQazwsD0CA&sa=X&oi=book_result&ct=result&resnum =&ved=0cbaqaewaa#v=onepage&q=surety%0and%0dots%0require%0perform ance%0bonds&f=false. Transportation Research Board. Accessed date November, 00.

15 Myers and Najafi 0. The Surety and Fidelity Association of America. Ohio HB The State Budget Hurts Small and Emerging Contractors and Puts State Taxpayers and Laborers at Risk, Accessed date October, 00.. The Surety and Fidelity Association of America. State Bonds Thresholds, Accessed date October, 00.. Myers, L. Performance Bond CostEffectiveness Analysis. Department of Civil and Coastal Engineering, University of Florida. Gainesville, FL. 00. p.. Levin, H. M. Costeffectiveness Analysis, Accessed date May, 0.. Associated Insurance Agency. The Importance of Surety Bonds in Construction, Accessed date November, 00.. Surety Information Office. Contract Surety Bonds: Protecting Your Investment, The Surety and Fidelity Association of America. Accessed date October, 00.. Surety Information Office. 00 Surety Market Report: Rising to the Occasion, The Surety and Fidelity Association of America. Accessed date October, 00.. The National Council for PublicPrivate Partnerships. Top Ten Facts About PPPs, Accessed date November, 0.. Washington Department of Transportation. Transportation Innovative Partnership (TIP) Program, Accessed date November, Associated Builders and Contractors. 00 Surety Market Overview: The Value of Surety in Today s Challenging Construction Economy, Accessed date October, 00.