By: Mark A. Rysberg

Over the last year, the state government and advocacy groups have attempted to find solutions for funding road construction and maintenance that had enough support to be enacted into law. Those efforts are continuing and the Legislature has approved various bills relating to funding improvements and maintenance to Michigan’s roads. Part of those discussions and legislature deserves some additional attention as it would implement changes to warranty requirements for public paving projects.

In that respect, House Bill 4613 would require MDOT, county road commissions, cities, and villages to obtain warranties from contractors for the full replacement or appropriate repair of paving projects that exceed $1.0 million. The scope of such warranties is not clear based on the language of the bill itself. As a result, warranty obligations may be defined by project specifications based on the estimated lifespan of the paving to be installed. While warranties are nothing new in the construction industry, this proposed legislation may impact the aggregate bonding capacity of contractors engaged in public transportation projects.

In public contracting, bonding capacity arises in the context of capacity per project and aggregate capacity. The bonding necessary for a specific project is largely dictated by the contract amount, which is a measure of the financial obligations owed by the bond principal to the owner or higher-tier contractor. To the extent warranty bonds are required, those obligations would compound existing payment and performance bond requirements increasing the amount of bonding necessary for a particular project. It would also decrease aggregate bonding capacity as warranty bonds would survive the completion of a project, which means that aggregate bonding capacity would be reduced by warranty bonds from projects completed years earlier.

Those issues could pose serious problems for contractors who are already at the upper limit of their bonding capacity. Although the future of House Bill 4613 is still uncertain, the issues of bonding and bonding capacity should be regularly evaluated. To that end, contractors performing bonded work should consider their bonding capacity and how impacts to bonding capacity can effect business operations. In that respect, bonding agents, accountants, and attorneys can provide insight to assist with maximizing and evaluating bonding capacity.

More from the Hilger Hammond Blog: