NACM Introduces New Construction Law Positions in 2014 Issue Brief

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For the first time ever, the latest edition of the National Association of Credit Management's (NACM's) Legislative Introduction and Position Brief contains a section dedicated to improving the nation's construction laws.

The section is posted below and focuses on H.R. 776, the Security in Bonding Act, which is currently under congressional consideration, and federal support for bonding requirements on projects funded under Public-Private Partnerships, or P3s. The new Brief also includes an updated section on the vital differences between consumer and commercial credit reporting, which will be posted next week.

Stay tuned for more on the 2014 Issue Brief, which will be printed in its entirety in the upcoming June edition of Business Credit.

Construction Law

Commercial credit, collections and financial risk management professionals who work in the construction industry for subcontractors and materials suppliers comprise more than 50% of NACM's membership. These individuals manage the complex process of extending credit to other companies while navigating the many rules and regulations that govern how work is performed on, or materials are supplied to, a public or private project. Payment on these projects is often secured through the use of liens, bonds and Uniform Commercial Code (UCC) filings, but the rights to these remedies are only extended to certain parties, and only if those parties follow the strict filing and notice requirements that often vary from state to state in the case of liens and bonds.

NACM’s mission is to ensure that the laws enacted provide adequate payment protection to the businesses that provide materials, equipment and services to public and private projects. The concept of payment protection for building and construction is not new: the first attempt to enact a law granting mechanic’s lien rights came from the urgent desire of our founding fathers to establish and improve—as quickly as possible—the future seat of the US government, Washington, DC. In the fall of 1791, Thomas Jefferson and James Madison urged the Maryland General Assembly to create a builder’s lien, ensuring that builders were paid for their work and materials. Protections similar to those that built the District of Columbia still exist today, and without them, companies engaged in supplying materials and goods used in construction would fall apart, and the entire construction industry would grind to a halt.

NACM believes that each jurisdiction's laws should facilitate the extension of credit by maintaining and expanding the lien and bond rights of subcontractors and materials suppliers. States should also work to make it easier for these companies to assert and maintain their rights to payment under the law by minimizing administrative and technical hurdles, which have a disproportionately negative effect on smaller companies that are already the least equipped to handle many states' onerous filing and notice requirements. The goal, as always, is to foster the extension of commercial credit, and NACM, on a national level and through its nationwide network of local affiliates, will continue to work with state legislatures to ensure that the construction laws they enact accomplish that crucial goal.

On a federal level, NACM supports legislation that would achieve similar ends. Congress should make it easier for all businesses, especially small ones, to participate in the construction industry and the federal procurement process by providing companies with the institutional security they need to provide goods and services on terms without facing the risk of nonpayment. The most recent efforts in the 113th Congress, specifically the Security in Bonding Act (H.R. 776), would be a welcome step in this direction.

Since 1935 the federal Miller Act has protected subcontractors and suppliers from the risk of nonpayment by requiring the prime or principal contractor on a federal project to provide a surety bond that assures the project itself will be completed and that contracted parties will be paid. These bonds must be provided by companies or "corporate sureties" that the US Department of the Treasury has determined are capable of meeting the bond's payment obligation, or, under the terms of the Federal Acquisition Regulation (FAR), by either corporate sureties or by unlicensed persons, also referred to as "individual sureties." Individual sureties are neither vetted by the federal government nor are they required to relinquish custody and control of any assets they pledge in order to secure a surety bond. This means, in many instances, these assets are insufficient to properly cover the bond's payment obligation, difficult to convert to cash, or nonexistent altogether.

H.R. 776 expands the Miller Act's bond requirements to individual sureties and would end the fraud and abuse that some of these entities have been allowed to conduct at the expense of subcontractors and materials suppliers on federal construction projects. The concern that payment for work performed will never arrive due to an individual surety's inadequate bond pledge keeps many small business subcontractors and materials suppliers out of the federal procurement process. The Security in Bonding Act does a great deal to alleviate this concern by giving subcontractors and materials suppliers the confidence they need to extend credit, enabling them to further contribute to economic and business growth and ultimately increasing competition in the federal marketplace and driving down costs to the benefit of the American taxpayer.

NACM also supports federal efforts to expand the Miller Act's protections for subcontractors and materials suppliers to apply to construction jobs funded by public-private partnerships, or P3s. The use of this innovative form of financing for public construction projects has expanded greatly in recent years, as federal agencies, and state and local governments, have sought to more efficiently use taxpayer dollars by incentivizing private firms to design, build and operate structures on public land for public use. But this effort to enable private entities to more easily fill in funding gaps for public projects only pays dividends if the payment protections for subcontractors and materials suppliers are preserved in the P3 arrangement, which they frequently are not.

The body of law governing P3s has not kept pace with their expanded use, meaning that most subcontractors and materials suppliers entering into a project funded through a P3 today will be granted no payment protections, and contracting agencies and entities that are authorized to enter into P3 arrangements are not required to grant any. State lien laws that provide subcontractors and materials suppliers with payment protections on private projects often do not apply because the P3 project is ultimately for public use, and public property is not subject to liens. Knowing that there are no clear payment protections on P3 projects (excluding those in Maine, North Carolina, Oklahoma and Texas where authorizing legislation specifically refers to P3s), savvy subcontractors and materials suppliers will either choose not to do business on P3 projects, or will price this added risk of nonpayment into the project, collectively limiting business participation and ultimately driving up the cost for taxpayers.

As it is in the four states with protections for P3s, any legislation that provides a federal agency with the ability to enter into a P3 arrangement should be amended to require that the agency build in payment assurances for subcontractors and materials suppliers through surety bonds. NACM believes the goal should be to facilitate the extension of credit, rather than limit it by allowing contractors to continue encroaching on subcontractors and materials suppliers' payment rights. Extending standard payment protections to P3s would encourage more companies to participate in projects funded by them, again driving down taxpayer costs while allowing businesses to grow by investing in projects built for the public's benefit.

NACM believes that any law that benefits subcontractors and materials suppliers benefits the entire economy, and its membership stands ready to support the enactment of any law that facilitates the extension of credit on both private and public projects.

- NACM

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of Credit Management

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