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Guidelines
for the Implementation of Subcontractor Bonding by State Agencies and
Local Public Bodies before State Regulations Are Issued
Developed by the New Mexico Building
Branch of Associated General Contractors in Conjunction with the Subcontracting
Industry, Surety Agents and Design Professionals
The passage of Senate Bill 814 (Taylor) will bring new challenges to public
purchasing of construction. The bill was signed by Governor Richardson
on April 5, 2005.
- It will become law on June 17, 2005.
- For public works building projects bidding after that date the law requires
subcontractors whose contract for work to be performed on the project is
fifty thousand dollars ($50,000) or more provide a performance and payment
bond.
Issues Created by the New Law
The one-paragraph addition to the Procurement Code relating to public purchases
has created many questions from contractors, sureties, and public works administrators. Just
a few are as follows:
- Where in the Procurement Code will the language appear?
- Does the law apply to all levels of subcontractors or just those in a contractual
relationship with the prime contractor?
- What bond sureties can be used?
- How can bid protests be avoided in the interim between effective date and
a date when rules produced by the State’s General Services Department
are available?
Suggested Guidelines
- It is recommended that a payment and performance bond be required of first-tier
subcontractors only and that the subcontractor bond be payable to the prime
contractor. The Subcontractors’ Fair Practices Act (SCFPA) is
a modifying component of the Procurement Code and may become the place in
the law where the language is inserted. Either way the SCFPA provides
guidance for
- The definition of “subcontractor” which is “a contractor
who contracts directly with the contractor” which suggests that performance
and payments bonds would be required only of the first-tier subcontractor
because that level has a contract with the prime contractor who in turn
contracts directly with the using agency. § 13-4-33 NMSA 1978.
- Payment and performance bonds must follow the lines of a contract and
should be payable to the prime contractor, not the using agency.
- The performance and payment bond provided by an affected subcontractor
should follow current law in the SCFPA (§ 13-4-37) that is
- Be issued by a corporate surety authorized to do business in New Mexico
in accordance with the New Mexico Insurance Code;
- Be a surety listed in the US Treasury Circular 570;
- Name the prime contractor as the obligee.
- The threshold amount for a performance and payment bond for a first-tier
subcontractor is $50,000 or more in work based upon the amount determined
on bid day. An affected subcontractor will have arranged for such bond
with its surety based upon its bid provided to the prime contractor to become
a part of its bid on bid day.
- Performance and payment bonds of first-tier subcontractors should be required
on projects with a bid date of June 17, 2005 or later. Although the
new language relates to a subcontractor’s contract, many projects bid
before June 17, 2005 were not bid contemplating bonds of subcontractors,
therefore the new law should be applied only to projects bid after the effective
date.
- The performance and payment bond required shall be provided to the general
contractor at the time the subcontract is executed.
- All instructions to bidders in project manuals should state the performance
and payment bond is at the expense of the subcontractor and clearly state
the amount and requirements of the bond. (§ 13-4-37)
- All instructions to bidders in project manuals should clearly state whether
or not subcontractors will be required to provide a performance and payment
bond. In the event that home-rule municipalities or highway projects
are not subject to the new law, the documents reviewed by potential bidders
should state that fact.
Avoiding Protests
By accepting the terms and the basis for the guidelines suggested above to
be included in project manuals and instructions to bidders using agencies and
contractors will reduce bidder protests on affected public projects.
All contractors
- Should note that projects bid on or after June 17, 2005 payment and performance
bonds are required of first-tier subcontractors whose contract for
work to be performed on the project is fifty thousand dollars ($50,000) or
more;
- Should inform subcontractors of the new law prior to accepting a bid from
them; and
- Should include in the terms of a contract with a subcontractor
- A requirement to provide a performance and payment bond paid for by the
subcontractor and
- Specify the amount and requirements of such bond included in the
subcontractor’s bid.
Posted May 19, 2005
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