P3 projects: What if you have payment problems?
Wednesday, August 13, 2014
Public-private partnership construction projects — commonly referred to as P3 projects — are becoming popular in the construction industry quickly. In fact, President Barack Obama recently took steps to expand the market for P3 transportation projects. This, along with the ordinary national trends, means that you're likely to encounter a P3 project soon.
But what does that really mean?
While the underlying construction tasks performed will be the same on a P3 project, the regulations, contractual obligations and legal rights available to you may be different — and, unfortunately, unfamiliar. This article specifically addresses what happens in the event you are slow-payed or not paid on a P3 project. What are your options?
Know what type of project your P3 project actually is
Wait, what? You may have had to read that subheading twice.
Traditionally, construction projects can be neatly classified into three broad categories: private, civil/state or federal. Determination of the type is quite simple. Private jobs are owned privately, civil jobs are owned by the state, and federal jobs are owned by the federal government.
Many incorrectly assume that P3 projects are a new type of project. In fact, this is usually not true. These projects are not formally defined in most states, and instead are simply a collaboration between public and private entities. Both the public entity and the private entity "own" the project.
The two parties come together and agree to terms, and these terms are largely unregulated. And just like on any other project, financial risks (and other risks) are shifted and allocated between the parties on the job.
Since these P3 projects are a creature of contract and agreement between the public and private entities, the underlying structure of the contract has significant impact on the available remedies in the event of default or nonpayment.
Furthermore, since different laws apply to different traditional project types, it is critical to determine which set of laws will apply to the P3 project. This requires examining the P3 project in order to classify the true nature of the project. Beyond the partnership, is this project owned privately, by the state or by the federal government?
Mechanics lien rights, bond claim rights or neither?
In the event of a default or nonpayment, what are the rights of the unpaid party? On standard projects, unpaid parties can pursue a mechanics lien filing (on a private project) or a bond claim (on a civil, state or federal project) to collect payment. But which of these remedies applies on a P3 project?
The answer is a bit nebulous.
At a high level, P3 projects that are performed on private property and part of a private project (for the most part) are likely to have standard mechanics lien rights. Those performing on a public project (for the most part), are likely to have regular bond claim rights. And, as frequently happens, private parties who lease public land and perform a P3 work are likely to have some type of leasehold-interest mechanics lien right.
This, however, is far from clear in laws across the country, and most are operating in a scary gray zone.
Two cases in California illustrate this. In South Bay Expressway v. Otay River Constructors, a mechanics lien was allowed on a P3 project for toll-road construction. The road was on public land, but it was leased to a private developer. Accordingly, claimants could file a lien against the tenant's private right to the land.
The opposite happened in North Bay Constr. Inc. v. City of Petaluma, where a mechanics lien was not allowed on a P3 project because the underlying land was public and the developer was not leasing the land (thus, creating a private interest).
Just because the mechanics lien right is not available doesn’t mean a bond claim right is available. While it is becoming very common for surety bonds to be required on these projects, unlike on state or federal jobs, they are not always legally required. This means parties who go unpaid and are not careful could wind up empty-handed.
For those projects where bonds are available, both the bonded party and potential claimant should refer to the P3 projects bonding FAQs published by the Surety & Fidelity Association of America for parameters: Frequently Asked Questions about P3s and Bonding
States are beginning to fill in the P3 payment hole
Oklahoma has taken the lead nationally in passing legislation to address P3 projects. The state has a law on the books requiring payment bonds to be provided on P3 projects, regardless of whether the underlying land is public or private. This eliminates ambiguities and protects all parties.
Other states are considering legislation, but it is slow going. A great reference for this pending legislation also comes from the Surety & Fidelity Association of America, which reports that "P3 legislation is moving slowly."
Here are a few items that present a great conclusion for this discussion:
- There is no easy way to know exactly what rules apply to P3 projects
- Once you figure out what type of P3 project is in play, there are few single solutions or answers
- Underlying public land will nearly eliminate the possibility for a standard mechanics lien
- Underlying private land will make it less likely that a bond claim opportunity is present
The law here is extremely confusing ... so be very, very careful.
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