The lease on the Buffalo Bills’ current home, Highmark Stadium, expires in 2023, and planning efforts for relocating to a new stadium started in 2014. The team, Erie County, and New York State, recently arrived at an agreement to build a new 60,000 seat stadium, with a price tag of $1.4 billion, in Orchard Park. An architectural firm has been hired, but they have yet to select a construction contractor for Buffalo Bills new stadium, and no date has been projected for breaking ground.
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Tax Payer Money to Pay for Buffalo Bills New Stadium
Although the Bills will design and build Buffalo Bills new stadium, they will pay it for through a public-private partnership. The Bills have made a $550 million commitment while the public contribution is anticipated to include $600 million from the state budget and $250 million from Erie County, for a total of $850 million in public funds–reportedly the largest taxpayer contribution ever for a professional football stadium. The Bills are required to pay any cost overruns on the project.
With taxpayer funds at stake, the Buffalo Bills new stadium will undoubtedly be subject to mandatory construction bonding as a risk mitigation strategy.
Surety Bonds as a Risk Mitigation Strategy for Construction Projects
Every construction project carries a certain amount of financial risk associated with the possibility of contractor default or nonperformance. For a project estimated to cost $1.4 billion, with both public and private money at risk, thorough risk analysis and mitigation are essential. In the construction industry, surety bonds play a critical role in protecting project owners and investors against the financial consequences of things not going as planned.
Bonding has been required for federally funded projects since 1893. Federal legislation enacted in 1932, known as the Miller Act, codified the requirement for contractors working on federal projects valued at more than $100,000 to provide both performance and payment bonds to provide financial protection for the federal government. Following suit, individual states passed their own “Little Miller Acts” requiring performance and payment bonds for state-funded public works projects. Today, construction bonding has become increasingly popular as a risk mitigation strategy for privately-funded projects of any size.
There are many reasons for contractor default. Contractors may bid too low in their eagerness to be the lowest qualified bidder, only to find themselves with insufficient cash flow to pay subcontractors, workers, and/or suppliers on time. Some contractors become overextended by taking on too many projects at one time and overcommitting resources. Any number of quality issues, delays, and cost overruns can result from inadequate or flawed planning or poor project management. Even well-planned and well-managed projects can get into trouble from unforeseen supply chain disruptions or sudden downturns in the economic environment.
Most risk mitigation strategies in the construction world involve the use of bid bonds, performance bonds, and payment bonds at a minimum, though other types of surety bonds also may be required. Surety bonds shift financial risk from the project owner to an entity known as a surety, which may be an insurance company or a division or subsidiary of an insurance company.
Bid Bonds
A bid bond protects the investment a project owner has made in advertising a project, soliciting bids, evaluating proposals, and negotiating a contract. It requires the bidding contractor to guarantee to accept the contract if selected as the lowest qualified bidder. It also guarantees the contractor qualifies for the performance bond that will be required upon contract award. The bond provides compensation for the project owner of the expenses incurred if they must repeat the process to select another contractor.
Performance Bonds
Performance bonds provide project owners with financial protection when a contractor declares default on a project or is found by the project owner to be in default. The bond ensures the situation will be resolved in a manner that results in project completion, one way or another. The most common remedies involve the surety:
- Taking control of the project, most often with the intent to oversee another contractor in completing the job
- Finding a new contractor to complete the project, with the project owner’s approval, without the surety taking over the project, which may also involve paying damages to the project owner or paying the new contractor more than is left on the contract
- Providing the financial and/or technical help the original contractor needs to avoid default and complete the remaining work on the project
- Paying damages to the project owner, which the owner can use to complete the project as desired, without the surety’s further involvement
Payment Bonds
Payment bonds protect subcontractors and suppliers when a contractor is behind in contractually required payments or is in default.
With funding from multiple sources, The Buffalo Bills Stadium project may require multiple levels of bonding to protect all the project owners and investors.
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