What Financial Resource Requirements Must be Met to Obtain a Contract for an PRT Project?

by Jeff Davis, 8/3/2012

The following discussion is related to Design-Build-Operate-Maintain and Design-Bid-Build transportation projects that will be paid for with public funds, perhaps partially with FTA money, and there are multiple proposals to being evaluated.

One consideration when reviewing proposals from suppliers for a given transportation system is Financial Resources of the proposers company or consortium of companies. Insight into the subcontractor agreements and the terms applicable to those can be required to help assess whether an additional restriction is applicable as the supplier might be required to reimburse subcontractors for progress payments within 30 days, and it may be as much as 60 to 90 days or more before receiving reimbursement from the Client. For large construction projects the amount of money a prime contractor will have to pay out and then wait for reimbursement can be considerable, in the millions of dollars.
Therefore, the financial resources and qualifications of potential suppliers are carefully reviewed by the Client.   If this review reveals that it appears the particular supplier does not have the cash reserves or line of credit to 'carry the float' then the supplier may be disqualified or excluded from further consideration due to perceived risk regarding completion of the project, i.e. significant risk they may go bankrupt before completing the project.

Keep in mind that some construction projects allow the Client to withhold as much as 10% of an invoice as retainage. This means that a Client may withhold money from each invoice as 'insurance' against the supplier defaulting or failure to perform. If the supplier has not factored this retainage into their Contract bid price it may prove to be an excessive financial burden, wiping out any profits, or worse. Note that the retainage is paid to the supplier at significant project milestones such as Substantial Completion (or Beneficial Occupancy) and Final Acceptance.  While the amount of retainage, if any, will be written in the contract, it may be reduced through negotiation if the supplier has continuously met the project schedule and the risk appears low.

Clients may require prime contractors to purchase completion and/or performance bonds for the project. If the Bond companies see the supplier or technology as having excessive risk they will either not issue the required bond or charge a high premium (so high that the Client may not be willing to reimburse the full amount).

In summary, potential suppliers of a PRT System will need to prove they have sufficient financial backing to show that they can complete the project without going bankrupt, leaving the Client with an unfinished/uncompleted project.  In addition they must be able to convince a bonding company/agency to issue construction (completion and/or performance) bonds at a reasonable price. If Clients believe that proposals from PRT suppliers can not, or will not meet these criteria they may disqualify or reject such proposals as they present significant financial risk.
While it is possible to approach a governmental entity and suggest some type of Public-Private-Partnership option, this seems to request the governmental entity to assume a greater risk than to go with a more standard product and company, whereby the supplier assumes most of the risk. For example if the governmental entity is to establish a partnership arrangement, "What would the cash flow look like with respect to the project schedule?" While there are many other questions to be addressed regarding this option, they will be deferred to another discussion.

Last modified: August 05, 2012