American Samoa Wants Local Companies To Obtain Federal Contracts

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Seeks waiver of surety bond requirements for smaller businesses

By Fili Sagapolutele

PAGO PAGO, American Samoa (The Samoa News, March 20, 2014) – To allow locally owned companies to compete for federal contracts, and thereby further stimulate the territory’s economy, the Lolo Administration is asking "all" federal agencies for a bond waiver program, or a 20% retention program currently used by ASG with projects funded by the U.S. Interior Department.

Prepared by the local Commerce Department, the request document was presented at the Feb. 25 meeting of the Interagency Group on Insular Areas (IGIA), where officials of several federal agencies dealing with insular areas were in attendance.

DOC said there are 54 construction companies in the territory and all of them are small businesses except for two major companies — Fletcher Construction and McConnell Dowell. The construction industry relies very heavily on government contracts as their main business since the majority of the business in this industry is derived from government contracts.

It also says bonding or surety is insurance utilized by project owners in construction projects to safeguard against defaults on construction contracts. Funding for American Samoa Government (ASG) construction contracts for the most part is from various federal government agencies for American Samoa’s infrastructural needs and improvements.

Generally, all federal agencies require surety bonds from companies that are on the US Treasury’s Circular 570 listing of Approved Sureties. "Because 96% of local construction companies are small businesses... our local construction companies except [Fletcher and McConnell Dowell] have difficulty obtaining surety bonds," DOC says.

The lack of a bonding/insurance company to issue such bonds in American Samoa compounds this problem, DOC says, and noted that McConnell Dowell and Fletcher have no difficulty in purchasing their coverage from outside of American Samoa, usually from the U.S.

Recognizing the difficulty the small construction businesses face when it comes to projects requiring bonding, ASG around 1997 secured with DOI the 20% Retention Program that is still widely utilized today.

DOC explains that the retention program calls for the withholding of 20% of all payments to contractors as security in lieu of bonding and can only be released upon full completion and satisfactory performance of a contract.

"The 20% Retention Program has allowed American Samoa’s small construction companies to participate in government construction projects, resulting in the creation of job opportunities that directly benefit the local population," DOC said. "Over the years, FEMA has recognized this program and joined DOI in allowing for this retention program’s utilization."

According to DOC, Fletcher exclusively concentrates on the construction of building structures and rarely ever bids on road construction; while McConnell specializes in road construction work and has never attempted to bid on building construction jobs.

"This distinction between the two hardly allows these companies to compete against each other in the bidding process. The rest of local construction companies don’t even bother to bid on projects that require bonding," it says. As a result, "ASG is forced to award the contract to the firms that can provide bonding, which are Fletcher and McConnell Dowell."

DOC said there could have been cost savings had the bid been awarded to the lowest, most responsive bidder assuming that everything else remains constant. For example, the Fagatogo Economic Development Project, was awarded to McConnell Dowell for close to $496,000, but the bid could have been awarded to GMA Inc. (whose bid was close to $473,000), but the company could not acquire a surety bond.

This same scenario, said DOC, happened with the awarding of the Leone Midkiff Elementary School Building Project where the first two bidders could not secure bonding; therefore Fletcher (whose bid was $1.79 million) was awarded the project as it could secure bonding.

DOC said the Fagatogo project would have saved more than $22,000 and Leone school project would have realized a savings of $500,000 if securing a bond wasn’t required for both federally funded projects.

According to DOC, both Fletcher and McConnell Dowell are foreign-based companies with corporate headquarters in New Zealand and Australia respectively.

"While both companies provide substantial job opportunities for the local population, virtually all of their management positions are occupied by officials from their headquarters," DOC said, while acknowledging that both companies "contribute to society because they do continue to provide significant contributions to the local community."

"Nevertheless, it is no secret that at least a portion of profits — whether substantial or otherwise — generated from federally funded contracts are repatriated to headquarters much like any other normal foreign-based firm. Salaries of management staff are also a cause for leakages," it says.

DOC said the 20% Retention Program has been widely accepted and utilized in projects funded by DOI’s CIP Program and FEMA-funded projects. Further, this program "has allowed for healthy competition among several bidders during the bidding process. FEMA-funded projects were emergency in nature and therefore did not necessarily undergo a competitive bidding process."

To support its position, DOC provided data of projects awarded between 2006 and 2014 and included the large number of companies who submitted bids, especially for FEMA and CIP programs.

From 2006 to 2014, a total of 28 construction projects worth more than $25 million have been administered under the retention program and out of the 26 projects that have been completed to date, only two projects defaulted.

"This represents a 92.3% success rate with only a 7.7% failure rate. Projects that defaulted were funded by DOI’s CIP Program, and fortunately for ASG, DOI agreed to fund the extra costs of completing these two projects. To ASG, the retention program has been highly successful," DOC said. "ASG probably wouldn’t have been able to undertake this many projects because bonding would surely have made costs of projects extremely expensive due to the lack of competition."

"ASG in no way discounts the significance of bonding for construction projects; it totally agrees with the rationale behind this safety net to manage risks associated with construction projects," DOC said, but "ASG is equally concerned with the impact of the lack of competitive bidding with bonded projects and what it does to the local construction industry."

"Allowing the noncompetitive nature of bonded projects to continue will undoubtedly absorb more financial resources, thus limiting ASG’s ability to undertake more projects to improve its infrastructural needs," it says. "This lack of competition will continue the trend of leakages from American Samoa’s economy for years to come."

In conclusion, "ASG requests that all federal agencies adopt the 20% Retention Program that was created by DOI and ASG up to a certain extent."

On the other hand, DOC said that the more expensive a project gets, the more risk is involved. Therefore, ASG proposes that all projects that cost $3 million or less be allowed to utilize the 20% Retention Program in lieu of bonding.

ASG further proposes that in the unlikely event of a default, that the funding agency follow DOI’s lead, by absorbing extra costs to complete a project. All projects costing more than $3 million should still require 100% bonding.

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