On federal projects, surety bond claims replace mechanics liens as the payment security device. For federal projects exceeding $150,000, the Miller Act requires that payment and performance bonds be present. While these bonds go a long way to protect subcontractors and suppliers, general contractors receive no protection. Sometimes, the government might waive the Miller Act’s bonding requirements. Following a recent study by the U.S. Government Accountability Office (“GAO”), we know that waiving bond requirements is rarely done.
The study can be found here.
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Waiving Bond Requirements
Surety bonds are necessary to ensure that public projects are completed and that everyone on the payment chain receives payment. Because they are so important, these bonds should not be waived without good reason. That’s why the House of Representatives called for the GAO to track the use of surety bonds on federal projects that utilize small businesses.
In it’s report, the GAO looked to statistics from the Department of Defense, Department of Veterans Affairs, and the Department of State. These three agencies combine to account for over 80% of federal construction contracts with small businesses. Noted in the report was the difficulty that some small businesses have with posting the required bonds. The Surety Bond Guarantee Program works to relieve this issue on the federal level. Recently, we’ve discussed how Louisiana, New Jersey, and Kansas City aim to do the same on the state and municipal levels.
Results of the Study
Unfortunately the GAO found that there weren’t any records on the subject. However, they did reach out to officials from the departments to discuss their experiences. Contracting officials from all 3 departments said that waiving bond requirements was rare. One Army Corps of Engineers official stated he could not recall a single instance of such a waiver. A Veterans Affairs official stated that he’d never seen a waiver in his nearly 30-year career. According to a representative from the Associated Builders and Contractors, no instances of a federal entity waiving bond requirements had been reported.
The study did find that there have been instances where surety bond requirements were waived for federal projects performed abroad. This finding was confirmed by officials from the Department of State and the Naval Facilities Engineering Command – both stated they have used waivers overseas. According to State officials, waiving bonding requirements has been necessary since small businesses could not obtain the required bonds. State added, however, that retainage was utilized to provide protections on those projects. They also noted that waivers have been used less frequently of late, as surety bonds have been easier to obtain.
The report also discussed surety bond fraud. According to officials from the three departments, they only found 4 cases of surety bond fraud combined on their projects in recent years. However, it wasn’t long ago we wrote about surety bond fraud on several federal projects with other agencies.
Surety bonds are important! That’s why federal agencies haven’t made a habit of waiving bond requirements. Without protection on federal projects, small businesses and top subcontractors would likely avoid work on federal projects. Considering the work to be done on America’s infrastructure, it’s important that no one is discouraged form working on federal projects.
For more on surety bonds, check out our Miller Act FAQ.