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F I S C A L I M P A C T R E P O R T
SPONSOR Vigil
DATE TYPED 3/5/05
HB 857
SHORT TITLE Procurement Code Subcontractor Bonding
SB
ANALYST Hanika-Ortiz
APPROPRIATION
Appropriation Contained Estimated Additional Impact Recurring
or Non-Rec
Fund
Affected
FY05
FY06
FY05
FY06
See Narrative
SOURCES OF INFORMATION
LFC Files
Responses Received From
Energy, Minerals and Natural Resources Department (EMNRD)
Department of Finance and Administration (DFA)
Public Education Department (PED)
Construction Industries Division (CID)
Public School Facilities Authority (PSFA)
SUMMARY
Synopsis of Bill
House Bill 857 adds a new section to the State Procurement Code requiring subcontractors to
provide a performance and payment bond on a public works building project if the subcontrac-
tor's contract for work to be performed on the contract is fifty thousand dollars ($50,000) or
more.
Significant Issues
Public works projects are defined in the procurement code as projects that require professional
services of architectural or engineering services; or landscape architectural or surveyor services.
The PSFA reports the provisions of the “Little Miller Act” require all construction contracts
awarded in excess of $25 thousand to include a performance bond and payment bond each equal
to 100% of the awarded bid amount. The bonds are intended to protect subcontractors and mate-
rial suppliers by providing a remedy for recovery of monies due on a construction project. The
pg_0002
House Bill 857 -- Page 2
owners are also protected to guarantee the delivery of the contracted work should the awarded
contractor fail to perform.
PSFA further reports that the Subcontractors Fair Practices Act currently requires each subcon-
tractor submitting a bid to a contractor to submit a payment and performance bond if so re-
quested by the contractor. This section also allows the expense to be the responsibility of the
subcontractor if the contractor in his written request for subcontract bids states the amount and
requirements of the bonds. The provisions of this bill will only make this mandatory.
DFA believe the bill provides a remedy for general contractors if a subcontractor fails to perform
in compliance with the conditions of a contract or fails to pay for materials or labor. It is not un-
common for a subcontractor to go bankrupt. If this should occur, a general contractor still must
meet the performance requirements included in its contract with the public entity.
If a subcontractor is required to purchase a performance and payment bond, the general contrac-
tor may be able to collect damages from the bonding company. Bonding companies will not en-
ter into a bonding arrangement with high risk subcontractors, thus lowering the risk to a general
contractor that the project may have delays.
PERFORMANCE IMPLICATIONS
DFA reports HB 857 provides no additional performance or payment protection for the State
since the State already has the ability to collect any damages from the bonding company. Ulti-
mately, however, the State may benefit from the possible elimination of higher risk subcontrac-
tors from public works construction projects.
FISCAL IMPLICATIONS
The costs of bonds are reported at approximately 1.5% and are typically passed on to the agency
as part of the costs of construction. The State pays the full cost of the performance and payment
bonds purchased by the general contractor. It is unclear how much of the cost of a similar sub-
contractor bond purchase would be passed on to the State.
Unless the State benefits from the employment of lower risk subcontractors, there would be no
incentive to pay any additional bonding cost, since the State is already protected by the general
contractor performance and payment bond. If the purchase of a subcontractor performance and
payment bond would improve the bond rating of the general contractor, the State might actually
incur lower bonding costs on behalf of the general contractor.
The PSFA believe these provisions may limit competition and increase the cost of construction
for public works contracts significantly. The bill as written makes subcontractor bonding manda-
tory on top of bonding required of the general contractor. Limiting the number of subcontractors
that are able to work on projects may be especially problematic on small rural projects.
ADMINISTRATIVE IMPLICATIONS
According to the CID of the RLD, it is not uncommon for subcontractors to be undercapitalized.
Agencies may incur additional bid prices due to increased operational overhead being applied to
bidders.
pg_0003
House Bill 857 -- Page 3
A reduction in the number of qualified bidder applicants may cause delays in the awarding and
completion of public works projects.
Individual agencies will have to determine how to enforce the provisions of this bill. The State
should hold the general contractor liable for completing the project according to the agreed upon
terms.
CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP
Duplicates SB 814
TECHNICAL ISSUES
HB 857 creates ambiguity as to whether the general contractor’s or subcontractor’s performance
bond is primary. It is also unclear whether the subcontractor would issue the performance bond
to the agency or general contractor. Bonding companies may also challenge which performance
bond should be called upon.
EMNRD notes that obtaining bonds from subcontractors may be difficult since there is no con-
tractual relationship between the using agency and the subcontractor. The subcontractor’s con-
tractual agreement is with the general contractor. The general contractor’s contractual agreement
is with the owner/agency.
The PSFA notes that specific requirements for payment and performance bonds on construction
are not found in the “procurement code”, but rather under Public Works Contracts.
OTHER SUBSTANTIVE ISSUES
General contractors believe this bill may cause subcontractors on agency funded projects to be
more reliable and financially responsible. General contractors report they figure a contingency in
the bid submitted to cover projects when a subcontractor fails to perform. If a general contractor
knew ahead of time that a subcontractor could bond a project, it may allow for a reduction in bid
amount and projects completed in a more timely fashion.
ALTERNATIVES
Existing policy will remain in place requiring contractors to provide a bond for public works
contracts.
The State could make a provision within the invitation to bid requiring the general contractor to
use only subcontractors that can procure a performance and payment bond on hazardous or par-
ticularly difficult projects. This could be done on an individual basis.
WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.
New Mexico general contractors will continue to assume the risk of subcontractors failing to per-
form as a normal part of doing business.
AHO/yr:njw