Report: States Should Reconsider Performance Bonds

States should pursue more modern options when it comes to protecting themselves in IT contracts, according to a recent report from NASCIO.

by / August 7, 2012

States can lower the costs of IT contracts by balancing performance bond requirements, according to a recent National Association of State Chief Information Officers (NASCIO) report. The brief, titled Leaving Performance Bonds at the Door for Improved IT Procurement, was released Aug. 1 and outlines the benefits of reining in performance bonds for IT projects.

Performance bonds can decrease competition among contractors and raise costs up to 40 times higher, according to the report. The federal government has abandoned performance bonds, and NASCIO encourages states to follow suit and pursue different measures to protect contracts.

“Weighing nonperformance, existing protections and the benefits of robust competition is a balancing act that no longer leans toward the use of performance bonds,” said Carlos Ramos, CIO of California and a member of the NASCIO State IT Procurement Modernization Committee. “State CIOs recognize that states need the flexibility to best determine how to protect itself from risk. In California, the State Assembly has unanimously passed legislation that helped lower performance bond requirements from 50 percent to a more feasible 10 percent.”

The three key conclusions in the report are:

1) A reasonable limitation of the application of the performance bond requirement will increase competition.

2) States have other contractual protections that are more effective than performance bonds, such as service-level agreements in appropriate projects, warranties and acceptance criteria.

3) Performance bonds should not be broadly required because, in addition to changes in the claims surety market, the original intent has changed with emerging technologies.