How Carbon-Based Fuel Regulations Will Affect Construction

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March 20, 2023

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Renewed Emphasis on Elimination of Greenhouse Gas Emissions

The Biden administration is engaged in ongoing rulemaking intended to move the U.S. ever closer to zero emissions of greenhouse gasses (GHG) that have played a major role in global warming and climate change. This involves the Environmental Protection Agency and the Department of Transportation’s National Highway Traffic Safety Administration proposing rules that reverse the previous administration’s rollbacks of fuel efficiency and emissions standards. Every sector of the economy is under scrutiny to determine the greatest opportunities for improvement and set priorities for reducing the amount of carbon being released into the atmosphere.

Strategies for Reducing Use of Carbon-Based Fuel

President Biden signed an Executive Order including a schedule for developing standards governing fuel efficiency and multi-pollutant emissions for light-duty vehicles through model year 2030, with standards for medium- and heavy-duty vehicles starting with model year 2027. In December 2021, the EPA issued final gas emissions standards for passenger cars and light trucks for model years 2023 through 2026 that should prevent more than 3 billion tons of GHG emissions through 2050. Standards for heavy-duty vehicles currently are under development.

Some of the rules already in force or under development pertain to transitioning from manufacturing vehicles powered by fossil fuels to the manufacture of electric vehicles. Others regulate the GHG emissions from existing non-electric vehicles, from passenger cars and light trucks to commercial trucks and buses to heavy construction equipment with diesel engines.

Impact on Construction

Construction companies should do the necessary research to anticipate how carbon-based fuel regulations will affect:

the cost and lead-time implications for the manufacture and transportation of construction materials
their current use and eventual replacement of trucks and other vehicles owned or leased by the company
their ongoing use and eventual replacement of owned or leased heavy equipment (for example, excavators and skid steers) with compression-ignition (diesel) engines as well as diesel-powered utility equipment (such as generators, pumps, and compressors).

Construction is responsible–either directly or indirectly–for 25% of overall GHG emissions globally and for nearly 40% of global carbon dioxide emissions from fuel combustion. Consequently, construction companies can expect to make some changes over the next decade or so to maintain regulatory compliance, which could conceivably impact a company’s bonding capacity.

Surety Bonds You Might Need

To operate and grow a construction company, a contractor must have sufficient bonding capacity–both in terms of the maximum amount a surety will guarantee per bond and the maximum aggregate amount of multiple construction bonds. In addition to examining a contractor’s financial strength and business practices, a surety will consider the contractor’s industry experience and track record, including their record for regulatory compliance.

The most commonly required construction bonds are bid bonds, performance bonds, and payment bonds, but other construction bonds may also be required for certain projects.

Bid Bonds

Bid bonds may come into play in competitive bidding situations. They are a common requirement for bidding on both government-funded projects and larger private projects.

A bid bond is a contractor’s guarantee to enter into a contract if chosen as the winning bidder, without any change in the bid price or other terms. The bond provides financial protection for the project owner and also guarantees that the contractor qualifies for performance and payment bonds, which usually are required for projects funded with taxpayer dollars.

Performance Bonds

The Federal Miller Act mandates performance bonds for projects of $100,000 or more funded by the federal government. The same requirement exists at the state level under the specific state’s “Little Miller Act.” The purpose is to protect the project owner against financial loss if the contractor defaults or fails to complete the job according to the terms of the construction contract.

Payment Bonds

The Federal Miller Act and state-level Little Miller Acts require a payment bond along with a performance bond for projects subject to these laws. In furnishing a payment bond, the contractor guarantees to pay suppliers, subcontractors, and workers per the governing contract. The bond indemnifies the project owner against any legal liability for the contractor’s unpaid bills.