Overview
The MBTA did not ensure that the Systems Integrator (SI) obtained a surety bond that would protect the MBTA in the event that certain work is not performed in developing and implementing the AFC 2.0 project. Further, the MBTA was unable to indicate the vendors that worked exclusively on the AFC 2.0 project. By not obtaining a “security by bond” for the AFC 2.0 project, as required by law, the MBTA may not be able to recover money it paid for the $935.4 million contract in the event that the contract is not completed. Additionally, a contractor may not fulfill the contract if a security bond is not in place. Typically, in a security bond, the contractor would turn over assets in the amount of the contract to the surety company. This would allow the MBTA to receive these assets as recourse if the contractor fails to fulfill its obligation. The lack of a “security by bond,” therefore, potentially puts a drain on public resources to complete a project for which the MBTA has already committed time and money. A security bond in place would at least allow the MBTA to recover some of its expended funds.
Authoritative Guidance
Section 29 of Chapter 149 of the Massachusetts General Laws requires the MBTA to obtain, and therefore requires the system implementation contractor to provide, security by bond for the development and implementation of the new automated fare collection system. This law states,
Officers or agents contracting in behalf of the commonwealth or in behalf of any county, city, town, district or other political subdivision of the commonwealth or other public instrumentality for the construction, reconstruction, alteration, remodeling, repair or demolition of public buildings or other public works when the amount of the contract is more than $25,000 shall obtain security by bond in an amount not less than one half of the total contract price.
Reasons for the Issue
MBTA management told us that Section 29 of Chapter 149 of the General Laws does not apply to them.
Recommendation
The MBTA should follow state law and require all contractors performing construction, reconstruction, alteration, remodeling, repair, or demolition to MBTA public works projects to obtain security by bond to cover one half of the total contract price in accordance with Section 29 of Chapter 149 of the General Laws. The MBTA should, in the essence of ensuring that contractors have surety by bonds in place, detail the bond requirements in the procurement process documents. This could serve to notify any potential contractors of their obligation to obtain a surety by bond before a contract even begins.
Auditee’s Response
The MBTA disagreed with the SAO’s finding, providing the following information:
1. Massachusetts G.L. c. 149, §29 Does Not Require Bonds for Performance Security.
General Laws. c. 149, §29 does not require performance bonds in any context. The title of the statute is “Bonds for payment for labor, materials, rentals or transportation charges; enforcement of claim; notice of claim; speedy trial, appeal, consolidation; dismissal; legal fees; posting statute.” (Emphasis added). The statute requires a bond “for payment by the contractor and subcontractors for labor performed or furnished and materials used or employed” on public construction contracts. As the Supreme Judicial Court has observed:
An examination of the many decisions construing and applying G.L. c. 149, s 29, and the several predecessor statutes now merged therein reveals repeated statements that the statutes were intended to protect laborers and materialmen from nonpayment by contractors and subcontractors engaged in the construction of public buildings or public works.
American Air Filter Co. v. Innamorati Bros., Inc., 358 Mass. 146, 150 (1970); see G.M. Builders, Inc. v. Town of Barnstable, 18 Mass. App. Ct. 664, 668 (1984) (“The statute ‘afford[s] security to subcontractors and materialmen in public works because they do not have the benefit of a mechanic’s or materialman’s lien, as would be the case in private construction work’”), quoting Floors, Inc. v. B.G. Danis, Inc., 7 Mass. App. Ct. 356, 358, (1979).
The statute is unambiguous. It requires payment bonds on public construction projects for the benefit of persons and entities that provide labor, materials, and certain other services on such projects. A payment bond is not the same as a performance bond and a payment bond does not guaranty a contractor’s performance for the owner/awarding authority. The SAO’s assertion that a G.L. c. 149, §29 payment bond would “guarantee the work performed” on AFC 2.0 is incorrect.
2. Massachusetts G.L. c. 149, §29 Does Not Apply to the ARPA Because That Contract Does Not Call for Construction of a Public Building or Public Works.
In addition, G.L. c. 149, §29 does not apply to the ARPA because the ARPA does not call for “construction, reconstruction, alteration, remodeling, repair or demolition of public buildings or other public works.” This language in §29 covers “contracts involving the actual physical ‘construction’ (including reconstruction, alteration, maintenance, remodeling or repair) of public buildings and improvements on land owned by the Commonwealth or one of its subdivisions, and contracts for the materials that typically go into such construction projects.” Andover Consultants, Inc. v. City of Lawrence, 10 Mass. App. Ct. 156, 160 (1980) (holding that a contract for the preparation of tax maps did not call for construction of buildings or public works, and therefore was not required to be procured pursuant to the statute governing procurement of public works contracts, G.L. c. 30, §39M); see G.M. Builders, Inc. v. Town of Barnstable, 18 Mass. App. Ct. 664, 668 (1984) (town was not required to obtain a G.L. c. 149, §29 payment bond when it entered into a lease and its tenant entered into a contract for construction).
As relevant to the SAO’s examination, the MBTA’s new fare collection system is the subject of two separate procurements. Pursuant to its enabling statute, G.L. c. 161A, the MBTA awarded the Project Agreement (later supplanted by the ARPA) to the Systems Integrator on a “best value” basis to design, implement, install, integrate, test, finance, operate, maintain and manage the new fare collection system. The Systems Integrator does not perform any construction work on public buildings or public works. . . . Rather, the MBTA awarded a separate contract to McDonald Electrical Corporation (“McDonald”) for the public works construction aspect of the new system. In Thorn Transit Systems Intern., Ltd. v. MBTA, 40 Mass. App. Ct. 650 (1996), the Massachusetts Appeals Court determined the following qualified as public works:
physical removal and installation of station fare collection equipment and associated equipment at the rapid transit stations, the wiring of various types of station communications, computer and support equipment, the reconfiguration and remodeling of rapid transit stations to accommodate the new system, the coordination of work with and oversight of the contractor selected to perform station modification work, extensive design services, and money room design and installation.
Id. at 653.
The ARPA does not call for the Systems Integrator to perform physical removal, installation or wiring work at MBTA stations or on other public land. . . . Rather, the MBTA heeded the instruction of the Thorn Transit Court and contracted with McDonald to perform the demolition and construction work on MBTA land pursuant to a low bid G.L. c. 30, §39M procurement. McDonald furnished a performance bond and a G.L. c. 149, §29 payment bond in accordance with the requirements of the MBTA-McDonald contract. Thus, the MBTA required a G.L. c. 149, §29 payment bond for “public works”—the McDonald contract—and did not require a payment bond for the non-public works aspects of AFC 2.0. The MBTA’s structure of its contracts conforms to the Thorn Transit holding. General Laws c. 149, §29 does not require a payment bond for a project that is not a public building or public works project.
3. The Collection of Contracts Associated with AFC 2.0 Provide Security for Project Performance.
The ARPA requires the Systems Integrator to design, implement, install, integrate, test, finance, operate, maintain and manage the new automated fare collection system. Boston AFC 2.0 OpCo LLC, as Systems Integrator, has contracted with Cubic Transportation Systems, Inc. (“CTS”), as the Implementation Contractor and the O&M Contractor (collectively, “Project Contractors”) to perform the Work. The MBTA did not require a performance bond from the Systems Integrator and the Systems Integrator did not require a performance bond from the Project Contractors. The SAO has not identified any statutory or regulatory requirement for performance bonds in this context. However, the structure of the AFC 2.0 Project provides several protections for the MBTA in the event of a Systems Integrator Default or other adverse event. . . .
The MBTA acknowledges that the security package associated with the ARPA is not as simple or straightforward as a performance bond for a design-bid-build or a design-build construction contract. However, the ARPA differs from these contracting methods because the Systems Integrator is required to finance the work under the ARPA. The MBTA does not make periodic progress payments as the Systems Integrator performs the Implementation Work. Rather, the MBTA makes milestone payments when the Systems Integrator delivers functionality, and availability payments for the Systems Integrator’s services in respect of financing, implementing, operating and maintaining the new automated fare collection system once the functionality is delivered. In this way, the MBTA pays for deliverables and services when received, rather than making downpayments for expected future performance. Paying for deliverables and services upon receipt reduces the MBTA’s exposure to financial loss if the Systems Integrator defaults before delivering functionality and services.
Auditor’s Reply
We disagree that Section 29 of Chapter 149 of the General Laws is ambiguous regarding its requirements. The plain language of the statute states,
Officers or agents contracting in behalf of the commonwealth or in behalf of any county, city, town, district or other political subdivision of the commonwealth or other public instrumentality for the construction, reconstruction, alteration, remodeling, repair or demolition of public buildings or other public works when the amount of the contract is more than $25,000 shall obtain security by bond in an amount not less than one half of the total contract price. [Emphasis added.]
We disagree that the “security by bond” on public construction projects and public works only provides protection for persons and entities that provide labor, materials, and certain other services related to public buildings and public works; the statute quite reasonably and rightly affords protections to the Commonwealth and its municipalities contracting on behalf of the public for these public buildings and public works. Even if this limitation existed, as argued by the MBTA, we believe it is a best practice for the MBTA to protect itself, its riders, and the taxpayers of the Commonwealth from undue risk. We believe securing “security by bond” is a prudent and appropriate step to take, even if it were not required by statute.
As noted by the MBTA in its response above, Thorn Transit Systems Intern., Ltd. v. MBTA, 40 Mass. App. Ct. 650 (1996) provides a more expansive definition as to what constitutes “public work,” finding that,
The alteration and remodeling work on certain Massachusetts Bay Transportation Authority rapid transit stations, in connection with the proposed removal of the current fare collection system and the provision and installation of a new collection system, is a “public work.”
We disagree with the MBTA’s assertion that the SI does not perform any construction work on public buildings or works. Section 6.4 of the contract outlines the SI’s responsibilities related to “SI installation work,” including the “procurement, physical installations, commission and testing of System Elements on all Vehicles and at all Retail Reload Locations.” While there is a carve-out for “Site Installation Work,” the SI is still responsible for the installation and related removal work at retail reload locations, SI locations, and vehicles. This relates directly to “removal of the current fare collection system” and “provision and installation of a new collection system,” as described in Thorn Transit Systems Intern., Ltd. v. MBTA.
In a concurring opinion in Thorn Transit Systems Intern., Ltd. v. MBTA, Justice Brown recognized the public policy benefits and protections provided by statutes such as Section 29 of Chapter 149 of the General laws, writing that “deviations from the prescribed bidding process [in this instance, bond requirements] create grave uncertainty among all interested parties and arouse public suspicion that something is amiss. . . . [And] all too often the result of such lapses . . . is . . . needless expense of public money in litigation.” Id. at 657–658.
We agree.
Setting aside the legal requirements discussed above, and that are apparent in Section 29 of Chapter 149 of the General Laws, there are strong public policy considerations in favor of the MBTA obtaining a “security by bond”—the payment structure of the contract calls for a large “bullet payment” in the amount of $174,817,352 due at Milestone M. This payment represents a risk that we believe the MBTA should insure itself (and ultimately, we the taxpayers) against, regardless of what the statute requires it to do.
This payment structure back-loads this large payment to Boston AFC 2.0 OpCo LLC, which may, before finishing the contract, cease operations as a result of financial problems, litigation, liquidation of the company, or for other reasons. If that were to happen, it is conceivable that the MBTA may not receive—immediately or at all—the benefit of a significant amount of work already completed under the contract. This would place the MBTA back at square one, as it were, creating delays and the potential of financial loss.
Some of these risks are addressed through contract language, but the risk remains that $174,817,352 of work will be conducted with a partner who may or may not be in business at the end of the contract. Such an event would cause loss and disruption for the MBTA, against which we believe it should protect itself.
In its response, the MBTA indicates that it believes that the structure of the AFC 2.0 contract provides several protections for the MBTA in the event of an SI default or other adverse event. We received and reviewed the additional information regarding these protections, provided by the MBTA with its response. Ultimately, these additional protections are irrelevant to our finding that the MBTA failed to obtain a “security by bond” for certain work under the contract, as required by law.
We are concerned about the MBTA’s indifference toward this law and disregard for best practices concerning this issue—especially considering the challenges the MBTA has faced. We find it disappointing that the MBTA has failed to acknowledge these areas for improvement and is instead choosing to defend the status quo. It is important to note that our findings and recommendations may be applicable to the way MBTA contracts beyond just the AFC 2.0 project. By refusing to adhere to best practices and the law in its contracting, the MBTA puts the taxpayers at risk for potential financial losses. Our finding and recommendations should be considered across all applicable MBTA contracts. The MBTA, according to its response, is missing an opportunity for improvement.
| Date published: | January 16, 2025 |
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