Management & Operations

Balancing the risks of performance bonds

Posted on February 1, 2004 by Frank Di Giacomo, Publisher

It’s no secret that the transit industry is still swimming against the tide. Although economic recovery is ongoing, states and local governments are struggling to balance their budgets and, in many cases, are rolling back their funding of public transportation projects. The end result is tighter constraints on transit systems and, in a ripple effect, their subcontractors and equipment suppliers. Anything that adds to the burden of these contractors and suppliers, especially rolling stock manufacturers, is to be avoided. Bonding issue addressed That’s why I was pleased to see that Jenna Dorn, administrator of the Federal Transit Administration, recently released a Dear Colleague letter on performance and payment bonds that dispels the notion that these sureties are required in federally-assisted procurements. Jenna distributed the memorandum at a recent meeting of the American Public Transportation Association’s Business Members Board of Governors. It was favorably received by me and my associates on the board. Rather than describe the contents of Jenna’s letter, I thought it would be more appropriate to relay her important message in its entirety. So, here it is. . . Dear Colleague, In working with our grantees and their transit suppliers, we have found some misunderstanding about the FTA requirements regarding performance and payment bonds in federally-assisted procurements, particularly for rolling stock procurements. In short, FTA does not require bonding in any amount for rolling stock or any other non-construction contracts. FTA leaves to the good business judgment of our grantees the discretion to determine the appropriate amount of bonding — if any — to incorporate in non-construction contracts. With APTA’s assistance, FTA examined the prices rolling stock manufacturers pay for bonds and how those prices have reacted to changes in the broader bond market. We found wide variation in manufacturers’ experiences overall, but a strong indication that railcar manufacturers have been particularly hard hit in terms of bond pricing and availability. Needless to say, high bond costs and reduced availability directly impact both the grantee’s bottom line and competition within the industry. I challenge each of you to carefully assess the risks involved in any given procurement and carefully balance those risks against the cost and competitive impacts of bonding requirements. At FTA, we will continue to work with the industry to identify cost-effective ways to manage risk, and will share that information through our Best Practices Procurement Manual. Additionally, we will continue to work with both the public and private sectors to ensure our grantees have access to the information they need to make informed choices as they consider bonds in their procurement practices. Even in the area of construction contracts (where bonding is an FTA requirement), we remain willing to review and approve sensible alternatives and exceptions to the bonding levels identified as adequate to protect the federal interest in FTA Circular 4110.1E. The circular notes that “a Grantee may seek FTA approval of its bonding policy and requirements if they do not comply with these criteria,” and FTA has approved exceptions to the circular requirements. As responsible stewards of our public resources, it is incumbent upon each of us to maximize the benefits generated by every transit dollar. Please review your bonding practices to ensure that you are prudently utilizing this important tool. I look forward to sharing the sound and innovative practices that the transit industry always generates. Sincerely, Jenna Dorn.

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