Performance and Payment Bonds for E-Rate Contracts

If you are a company that does business in the public arena for school districts, you are probably familiar with the E-rate program.

This program, also called The Schools and Libraries program was implemented to make telecommunications and information services more affordable for schools by way of the Universal Service Fund. The E-rate program was implemented in 1997 by the Federal Communications Commission and administered by the Universal Service Administrative Company. It offers funding and discounts to eligible schools, with larger discounts and funding in rural and impoverished areas. To put simply, the E-rate program helps upgrade schools with wi-fi, phone systems, broadband, and internet.

Once a school district has either applied or been granted funds from the E-rate program, the next step is for the school district to issue a request for proposal to get pricing on installing the upgrades. Often times school districts request bids without having funding in place. This can pose a problem for the contractors bidding on the work because most of the time, these E-rate contracts required bonding. The bids require bid bonds in order to submit a bid, and upon award the contracts require performance and payment bonds.

 

Why is this a problem for some E-rate contractors?

This is a complex question that will mandate a multi layered answer.  Contractors that work in the public arena need bonds to survive.  It is the company lifeblood if you will. Each and every contractor has a single and aggregate bond capacity and when the aggregate is filled the contractor can no longer bid. This is an issue for most growing contractors and nothing new to surety professionals and companies. When a contractor asks for a bid bond that could take its bond capacity to the max, the contractor learns if he was low on bid day. Since low bid wins the job in most cases, the contractor can either keep bidding on more projects if not low, or stop bidding if they are low and out of bond capacity.

For E-rate contracts, the selection process is not as simple as ‘low bid’ contracts, and this can lead to the contractor running out of bond capacity before he even knows whether or not he will win any of the contracts for which the contractor bid. Here are three main reasons the contractor could run out of bond capacity:

1. Many schools have not actually been granted funds for the E-rate contracts they are putting out to bid.  This creates delays and can postpone notices of award
2. The selection isn’t based on low price but best value. The school district board looks at many factors, slowing down the process of award.
3. Schools issue RFPs for E-rate contracts in the beginning of the year, forcing contractors to bid on several hundred thousand dollars in bids. This often drains the company of its available bond capacity. Because of the best value methodology of awarding bids, it often takes several weeks to award.

The result of these issues can be frustrating to E-rate contractors because they know the likelihood of getting awarded all of the RFPs they bid is small. They often don’t understand why a surety cannot continue to issue bid bonds when there is no guaranty they will be awarded.

 

Is there anything a contractor can do help overcome these issues?

Yes, and the answer is education.  Educating the contractor to the concerns of the underwriter, and educating the underwriter to the intricacies of E-rate contracts. There are surety companies and underwriters that look at E-rate contracts slightly differently than other more traditional “sticks and bricks” underwriters and the results are substantial. An underwriter who truly understands how contracts are awarded under the E-rate program will most likely not count 100% of the bid bonds issued against the contractor’s bond capacity. Having the “right” surety company as a partner is very important for contractors pursuing E-rate work.

In closing, the E-rate contractor should understand that bidding on these types of projects, the lag time to award can cause an issue in bonding capacity. The contractor should choose its surety partner carefully to ensure the surety can meet the demands of E-rate bidding season.