Subcontractors support Federal ‘Security in Bonding Act’

The American Subcontractors Association warned the Subcommittee on Courts, Commercial and Administrative Law of the U.S. House of Representatives’ Judiciary Committee that “a payment bond from an individual surety providing only illusory protection can easily result in a catastrophic loss to a small subcontractor or supplier.”

ASA told the subcommittee that the Security in Bonding Act of 2011 (H.R. 3534) is “a targeted Congressional intervention” that the full Judiciary Committee should approve without delay to prevent such losses.

ASA filed a letter for the record of a March 5 hearing on H.R. 3534 praising subcommittee Chair Rep. Howard Coble, R-N.C., for giving ASA and other parties an opportunity to publicly explain why existing federal law needs to be amended by H.R. 3534 to correct a glaring financial risk facing some of the most vulnerable small construction subcontractors and suppliers that work on federal projects. “Payment bonds provided by individual sureties are essentially worthless, unless the pledged assets are real, adequate in amount, and readily available to meet the legitimate payment claims of the myriad subcontractors and suppliers performing on a typical modern federal construction contract,” ASA explained.

“Subcontractors and suppliers should not be put in the position of finding out, in their hour of greatest need, that the assets pledged by an individual surety are illiquid, otherwise unavailable or simply insufficient to respond to their payment bond claims on federal projects,” said 2011-12 ASA President Kerrick Whisenant, Cornerstone Detention Products Inc., Tanner, Ala. “The Security in Bonding Act would give construction subcontractors and suppliers the confidence that the bonds furnished by the individual surety will provide the payment protection of last resort intended by the Miller Act.”

The Security in Bonding Act, introduced by Reps. Richard Hanna, R-N.Y., and Mick Mulvaney, R-S.C., would require individual sureties that provide bonds on federal projects to use only assets that can easily be liquidated to quickly fund valid claims. It also would require that those assets be placed in the custody and control of the federal government. Currently, individual sureties only have to pledge “acceptable assets” that can include stocks, bonds, and real property, and they retain custody and control of those assets pledged to secure a bond.

Under the Miller Act (31 U.S.C. 9303), bid bonds and performance bonds protect the government, as steward of the taxpayers’ money, while payment bonds provide payment protection, of last resort, for the subcontractors and suppliers that have performed their obligations in furtherance of a federal construction contract. Not all payment bonds protect subcontractors and suppliers equally. Current federal regulations contain two different standards regarding the assets that a surety can pledge to assure payment of subcontractors or suppliers on federal projects. One set of standards applies to corporate sureties, but a weaker set of standards applies to individual sureties, permitting individual sureties to pledge unusual, illiquid and potentially even worthless assets to allegedly assure subcontractors of payment. “Claims against a payment bond under the Miller Act are generally paid in cash, not, for example, timber ‘available’ to be harvested for milling,” ASA said in its letter.

ASA told the subcommittee that H.R. 3534 would simply apply “to individual sureties the same standards permitted by the Miller Act … for a prime contractor choosing to furnish ‘eligible obligations’ rather than a surety bond.” The U.S. Department of the Treasury vets and approves the corporate sureties allowed to issue surety bonds for federal projects, but individual sureties may be anyone who is willing and able to guarantee contract performance with his or her own assets. ASA strongly supports the programs operated by the U.S. Small Business Administration to facilitate access to surety bonds issued by corporate sureties that have been vetted and approved by the Department of the Treasury.

Individual sureties are not required to be licensed in any state or to be approved by the Treasury, and while some individual sureties may be able to provide the liquid assets necessary to provide assurance, others cannot or do not.

This uncertainty, ASA pointed out, creates “severe” challenges for federal contracting officers asked to evaluate the assets pledged by individual sureties.

“To these small subcontractors and suppliers, at every tier, it is paramount that the Miller Act payment bond required for their protection is actually backed by assets that are real, adequate in amount, and sufficiently liquid to be available to pay a claim for payment of the amounts due to them for the work that they have fully performed,” ASA wrote.

The Security in Bonding Act is also supported by the National Association of Surety Bond Producers, the Surety & Fidelity Association of America and other major organizations representing the construction industry.  Read More.