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Contractors of DOT Projects Confront Credit Complications

Contractors on large Department of Transportation (DOT) projects could face credit complications in the foreseeable future in connection to minimal state revenue growth and federal funding, Fitch Ratings reported on April 13.

State-level funding was often provided for such projects but has declined over the past few years, leaving contractors to seek other sources. One example is bridge financing, which Fitch said allows contractors to enter into low-cost contracts that they then increase by order changes or dispute resolutions. Although these excess costs might get repaid, contractors' credit is affected because of the ramifications on their "near-term liquidity and working capital."

"The National Association of State Budget Officers reported that 22 states made midyear budget cuts in fiscal 2017," Fitch said, "and midyear budget reports and executive budget proposals released to date indicate some will report deficits for current and upcoming fiscal years."

Fitch also noted how the U.S. administration's infrastructure proposal relies heavily on state budgets; therefore, federal funding probably won't come to pass. The majority of the plan revolves around roughly $200 billion in federal funding in the next decade, but it's specifically geared toward transportation programs that are underway.

"States and local governments are asked to provide up to an 80% match for competitive grants and loans for $120 billion of the $200 billion in total funding," Fitch added.

-Andrew Michaels, editorial associate

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Wednesday, 29 June 2022