What Subcontractors Need to Know About Getting Paid on P3 Projects

By: Thomas R. Yocum, Esq. and Patrick M. O'Neill, Esq.

What is a Public Private Partnership?

Public owners exploring alternative delivery models are turning, more and more, to so-called "public-private-partnerships" (P3) to construct complex public works projects.  Public projects as diverse as airports, hospitals, roadways, bridges, waterworks and sewer systems lend themselves to completion under a P3 delivery approach. The typical P3 arrangement involves a long-term contract between a private party - often a coalition of investors similar to a real estate investment trust that may include constructors, designers, lenders and others - and a government entity seeking delivery of a public asset and long term services related to that asset. In most P3 arrangements the private party - or coalition of investors - bears significant risk and management responsibility but stand to earn significant performance based fees over the life of the public asset. Many argue that assets procured via the P3 procurement model perform more efficiently and ultimately save the taxpayers money as opposed to the traditional design, bid build system.

The Future of P3s

A P3 differs from a service contract, turnkey construction contract and other delivery models best categorized as public procurement projects in that a P3 leverages the ownership interest and profit motive of the private players. Increasingly, jurisdictions that adopt P3 delivery models pass laws and regulations intended to facilitate procurement of public assets via the P3 approach. The current political climate at both the state and Federal levels increases the likelihood of more massive infrastructure projects - like airports, sewer systems, water treatment plants, bridges and highways - via a P3 procurement method.  However, the increased use of P3 as a procurement method raises concerns for subcontractors and suppliers of construction equipment, components and materials.

Impact of P3 Delivery on Subcontractors

Subcontractors and suppliers are concerned about the proliferation of P3 as a delivery model because the hybrid public-private nature of a P3 confuses application of lien laws and may dilute the effectiveness of public payment bonds and key contract provisions that provide assurance of payment. The conundrum, from a subcontractor or supplier's perspective, is that mechanic's liens do not attach to public property, and the private players in a P3 arrangement may not require posting of a payment bond as would be required on a public project. Since public property (unlike private property) is not subject to mechanic's liens, one arrow is missing from the subcontractor / materialman's quiver.  The absence of a payment bond removes another. Deprived of two important mechanisms that ensure payment, subcontractors and suppliers on P3 projects may be exposed to additional risks. In the foregoing scenario there is no assurance of payment to subcontractors and suppliers. So what steps must subcontractors and suppliers take to protect themselves on such projects?

Protecting Subcontractors on P3 Projects

The first and most important step to protecting your position as a subcontractor is to understand the scope and nature of any P3 project on which you intend to bid. Specifically, lower tier stakeholders need to know precisely what lands or what portion of any project are public or private and who, if anyone, is responsible for obtaining payment bonds for the project. If the entire project is located on public lands, and all portions of the project are public, then payment can only be assured via a public lien on funds or a claim against as a payment bond. Most P3 projects, however, involve a hybrid combination of public and private property rights, and the need to record traditional liens that attach to private property cannot be ignored. Accordingly, a thorough investigation of the project is required. Further, careful review of contract terms related to payment, interest on unpaid invoices, right to recover attorney's fees, and similar provisions is imperative.

Fully understanding what action may be necessary to fully protect payment rights requires consulting legal counsel at the outset. Lien laws vary from State to State, so consulting counsel familiar with the laws of the State where the project is located is key.  Generally, subcontractors are required to strictly follow the law to properly perfect and enforce a lien. Subcontractors should not attempt to file liens without legal assistance. Experienced counsel should be consulted to prepare, file, and enforce a mechanic's lien. The following discussion presents an example of issues that can arise on P3 projects, and what actions can be taken to assure payment. This discussion focuses on Ohio law.  Local counsel should be consulted to ascertain to what extent these strategies may apply in a particular jurisdiction.

Notices of Commencement (NOC) are required at project inception in Ohio on both private and public projects. The contents of the NOC and procedures relating to the NOC are quite different between private and public projects. The private NOC includes a legal description of the property which can be used to lien the project.  The public NOC does not contain a legal description, but is required to contain information regarding the payment bond posted for the project. Although the private NOC also provides for disclosure of payment bond information, usually there is not a payment bond on private projects.  Unfortunately, subcontractors are discovering that some P3 projects do not have payment bonds that would typically be required on public projects. This information should be available by obtaining a copy of the NOC.

Since liens cannot be filed against public property, the remedy on a public project is either to lien project funds payable to the prime contractor or to assert a payment bond claim. Where a prime contractor defaults, there may not be funds available to lien, so the availability of a payment bond takes on increased importance.  Unfortunately, on P3 projects, payment bonds may not be posted the same as they would be required on a purely public project.  This may come as an unpleasant shock to a subcontractor who experiences non-payment.

Kenwood Towne Place

Clients represented by the authors of this article experienced the impact of a P3 project relating to the construction of a new public parking garage and retail complex known as Kenwood Towne Place in Cincinnati, Ohio.  The project consisted of a public parking garage which supported private commercial and office space above. This $175 million project was woefully under-funded.  After funds ran out and construction stopped, approximately $50 million of liens (both private and public) were filed.

As subcontractors scrambled for sources of payment, they realized there was no payment bond on the project.  Many expected there to be a payment bond, since it was a "public parking garage."  However, the funding for the garage was actually through private investment bonds, which enabled the developer and the public "port authority" to circumvent Ohio's payment bond requirements on purely public projects.

Most of the subcontractors worked on the private part of the project and could only file liens on the private property.  The mortgage exceeded the value of the property, so the private liens (for the most part) were worthless. Funds were available on the garage to pay about a third of the amount of the public lien claims.  Liens could not attach to the public garage itself.   

Our client group of 15 subcontractors and suppliers (owed about $8 million) came together to vigorously pursue multiple legal claims against the developers, constructor, lenders and others. The public/ private jumble on this project provided fertile legal ground for creative legal claims. Discrepancies existed between the initial NOC filed by the developers on the "private project" and a subsequent NOC filed relative to the "public project." The mortgage omitted a key parcel of real estate which became a powerful bargaining chip for those subcontractors that liened this parcel.  Many subcontractors did not lien this parcel, since its description was not included in the NOC. After years of bitter litigation members of our client group recovered most of what was owed to them; whereas, other subcontractors received little or nothing.

Lessons Learned

  • Understand the nature of the project and what payment assurances exist
  • Ascertain if there is a payment bond
  • Determine if the project is adequately funded
  • Press for a proper Notice of Commencement
  • Take steps necessary to preserve lien and bond rights
  • File liens against both the project funds (as on a public project) and against private property
  • Involve experienced counsel early

The above discussion illustrates the potential complexities and payment problems that a P3 project can present.  It also illustrates the difference that experienced counsel such as are available through the American Subcontractors Association Attorneys' Council can make.  

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Thomas R. Yocum and Patrick M. O'Neill are partners with Benjamin, Yocum & Heather in Cincinnati, Ohio.  Tom has been the ASA Attorney in Cincinnati for over 30 years and is currently Vice President of ASA of Ohio.