Just days after struggling fire apparatus maker American LaFrance filed for reorganization in U.S. Bankruptcy Court in late January, the federal Assistance To Firefighters Grant program posted a statement of advice on its Web site in response to questions raised about apparatus manufacturing delays.
The timing was coincidental, according to program officials, and the posting does not refer to any manufacturer by name. But the message was prompted in part by difficulties fire departments were having with overdue deliveries of new trucks from American LaFrance.
Because of problems with grant-funded apparatus purchases, last year AFG officials began requiring fire departments to obtain performance bonds and write performance penalty clauses into their contracts with truck makers.
“Manufacturers were getting too large a down payment, and then once they had the money, they didn’t deliver and six months after they were supposed to have delivered the truck the department was still sitting there waiting for delivery and there was nothing they could do,” said Brian Cowen, the AFG program director. “So we thought that the best way to deal with it was to basically take out an insurance policy.”
AFG now requires an apparatus manufacturer to provide what it calls an advance payment bond from an independent bank, insurance company or bonding agency in an amount at least equal to any payments made to the manufacturer prior to delivery.
If no down payment is made, an advance payment bond is not necessary. But in all cases AFG requires that a vehicle purchase contract include a performance clause stipulating a date of delivery and providing penalties of no less than $100 a day if the delivery is late.
Fire departments are expected to do everything they can to get an apparatus manufacturer to deliver a truck within the allotted “period of performance,” the time given in the grant application to make the purchase. But departments can ask for time extensions and are more likely to have them approved if they have complied with the bond and penalty clause requirements.
“In a case like American LaFrance, where a department is doing everything it can in order to get a vehicle as soon as possible, then we’re going to recognize that and not be sticklers for timing because obviously things are being done to try to deal with the situation,” Cowen said.
New Lexington Failure
One of the most difficult situations AFG officials have had to confront was the failure of the New Lexington Fire Equipment Company of Rockwood, Pa., two years ago. More than 20 fire departments were victimized, and about half of them had used AFG funds to pay for their apparatus orders. More AFG money was made available to the departments that had used the program to make their purchases.
“We really had to come up with some different ways to try to help them out because they were really in a bad circumstance in that case,” Cowen recalled.
He noted that the American LaFrance case is different because the company voluntarily sought Chapter 11 reorganization to continue building apparatus.
In its Bankruptcy Court filings American LaFrance discussed its backlog of orders relative to performance bonds and penalties.
Selling Trucks Below Cost
“The management team determined that ALF was selling several trucks below the material costs of the truck,” the company said. “The management team reviewed and prioritized the backlog of trucks by profitability, taking into account associated penalties for late delivery and bonding requirements.”
Of 316 fire trucks in the backlog when it filed for bankruptcy, ALF said it may reject over 30 truck contracts.
The company said it would continue to manufacture trucks that are subject to performance bonds, but would not produce trucks expected to result in a loss. It predicted it would emerge from bankruptcy by May as a much stronger company.
American LaFrance’s financial troubles and its difficulties delivering on apparatus purchase contracts was one of the reasons for the AFG posting on vehicle manufacturing delays in early February.
“We have been concerned about the apparent disconnect that exists between a fire department’s urgent need to replace old and/or unsafe vehicles and its willingness to wait a long period of time to obtain the new vehicle,” the posting said. It reminded fire departments that they are responsible for managing their AFG grants.
“If you are experiencing manufacturing delays in the delivery of your vehicle,” it said, “we recommend that fire department leadership make a conscious and deliberate determination about the best course of action.”
AFG officials suggested fire departments consult lawyers and posed a number of questions for them to consider:
- Where is the vehicle in the production schedule?
- What period of time has elapsed since the order was placed?
- What commitments did the manufacturer make regarding a delivery date?
- Is the new delivery schedule is realistic?
- If funds were provided in advance, are those funds retrievable if you determine it is in your best interest to void the contract?