Would Broader use of P3s Benefit Subcontractors?

Would Broader use of P3s Benefit Subcontractors?

Illinois, P3s
January 2, 2019

Public Private Partnerships or, as they are commonly known, P3s or PPPs, are a method of involving private parties in some or all of the financing, design, construction and operation of traditionally public building or infrastructure projects.  Recently, P3s have become a more popular means of constructing or financing public projects.  They have received more attention because some states, such as Illinois, are short on public funds and long on the need to repair crumbling infrastructure and deliver necessary public buildings.  A P3 might entail a private entity participating in financing, designing, building and operating a facility normally operated and controlled by a local or state government or, alternatively, it might include only some of those steps with a private developer utilizing a public body’s bonding authority or agreeing to accept payment from the operation of a revenue producing asset.  An example of a well-known P3 project is the Chicago Skyway, which, in 2005, became the first privatization of an existing toll road in the United States when a private concession company took over its operations under a 99-year operating lease. Because P3s are created by contract, they vary greatly from one state and one project to another.  For that reason, to protect the public, many states have enacted broad enabling legislation that describes the potential uses of P3s as well as the restrictions on their use.  Illinois currently has project specific P3 laws, but no comprehensive P3 law to provide direction for government bodies that might wish to use the P3 construction delivery method.  In recent legislative sessions, Illinois has entertained but not passed into law enabling legislation and, parties with a stake in the process should anticipate those efforts will continue.   

Any comprehensive P3 law should account for the rights and responsibilities of all participants in the construction process, while accommodating the intended beneficiaries of the project and, of course, promoting the interests of the public-at-large.  With all those competing interests to weigh, how should such a law consider the concerns of subcontractors?  While the existing Illinois Public-Private Partnerships for Transportation Act,  states a "public-private agreement may" provide for a performance and payment bond, it is not mandatory. Two other project specific enabling laws in Illinois do incorporate the Public Construction Bond Act, but the most recently proposed Illinois bill to enact broader enabling P3 laws does not require a surety bond. 

Subcontractors should be watchful that any proposal for a law enabling the broad use of P3s not undercut the rights of subcontractors under existing laws and contracts to: 1) secure payment for work and materials furnished for a project; 2) protect subcontractors and others under public procurement restrictions; 3) mandate prompt payment of invoices; and 4) recognize flow-down responsibilities from higher tier participants in the construction chain.

Construction is almost never paid for in advance and instead, labor and materials are furnished on credit and contractors, subcontractors and suppliers are vulnerable to non-payment.  Mechanics liens protect the right to payment on private projects, but mechanics liens are not allowed on public projects.  For public projects, almost all states require payment to subcontractors be secured by a payment bond with a surety.  Because P3s are a hybrid between public and private, neither liens nor bonds are assured as a means to secure payment.  A project built on public land with private money and private control would only protect subcontractor payment if the P3 contract documents required it or if the P3 enabling law mandated a payment bond be furnished on all P3 projects to ensure subcontractors and suppliers be paid for labor and materials furnished.  Though a mechanics lien is available against a private party’s leasehold interest in public property, such liens may have limited value and be difficult to enforce.  A P3 project is potentially lienable if the property was transferred from the government to the private operator.  For clarity, a P3 enabling law should mandate the use of a payment bond on all projects to ensure those who furnish labor and materials get paid.  Also, requiring a payment bond will encourage more reasonable bids by subcontractors and suppliers who are more optimistic they will be paid.

Public projects are often bid competitively and subject to complex procurement laws and regulations intended to prevent corruption as well as to promote larger public policy goals.  Protection for small and minority businesses and mandating a fair wage are common requirements on many public projects. Some public procurement laws require the use of multiple prime contractors, and others restrict switching subcontractors after bids are submitted to encourage subcontractor participation in the bidding process, and to protect the subcontractors who do participate.  Absent a requirement in the law, P3 projects need not comply with well-established public procurement laws, putting the public and the construction participants in peril of seeing private companies evade public policies and procurement safeguards that protect public funds from private plunder.  

Most states have laws for public as well as private projects that obligate owners to make prompt payment for work completed and to otherwise enhance payment rights on construction projects, but the protections on public projects are more common and more meaningful.  Illinois has a State Prompt Payment Act, a Local Government Prompt Payment Act, and for private projects, a Contractor Prompt Payment Act.  The State and Local acts afford better protection to contractors and subcontractors than does the Contractor Prompt Payment Act, but none automatically apply on a P3 project without a clear P3 enabling law to specify which laws apply for the hybrid projects.  Thus, to level the playing field for contractors and subcontractors on P3 projects, enabling law should specify which payment protection laws apply. 

Finally, a contractor and a developer might understand the rights and responsibilities of the owner and contractor on a unique P3 project, but a subcontractor likely will not.  The allocation of risks between owner, developer, designer and other participants in a P3 project vary greatly from one project to another.  For a subcontractor, the sometimes onerous provisions in a subcontract would be even more unpredictable in a P3 project.  For example, a pay-if-paid provision in a subcontract would take on a much different meaning if the contractor had agreed to await payment until the asset had been in use for several years.  Further, standard flow-down provisions imposing duties on an unknowing subcontractor comparable to the unique undertakings by a contractor on a P3 project would be wholly unpredictable.  By describing the permissible uses and expectations for P3 projects, the legislature would not only protect subcontractors but, in addition, encourage responsible subcontractors to bid on P3 projects. 

P3s offer a promising solution to fund state and local government’s capital programs when those governments would otherwise not have the funds available to repair crumbling infrastructure and build new schools and other structures.  If P3s are properly established with enabling laws that consider the rights of all potential parties in the process, the projects are more likely to be successful.  By establishing a fair and open process for the use of P3s, the ultimate goal of advancing the public interest will more likely be served.