When a construction project goes sideways, a subcontractor’s ability to place a lien or perfect a bond claim is often the difference between making a profit (or breaking even) and taking a loss. And, as any contractor that does a substantial amount of government contracting work knows, bonds are the only game in town for most local, state and federal government work.
On federal projects, the statutory requirement for the provision of Miller Act payment bonds provides a measure of confidence for subcontractors that there will be payment at the end of the job, even if the prime defaults or breaches its agreement. To perfect a Miller Act claim, a first tier subcontractor need only bring suit on the bond within one year of completing itswork. A second tier subcontractor need only give notice to the prime contractor within 90 days of completing its work. Compared to a Texas public bond (which includes third month notice, sworn statement of account, and copies of contract requirements), perfecting a Miller Act bond claim is as simple as it gets.
Success or failure for a subcontractor often depends on the company’s ability to price risk. When risk goes up, bid values often follow suit. On federal projects, payment bonds are typically issued by well established companies. In fact, an interested subcontractor can access a comprehensive list of all of the corporations that have been approved to act as sureties for Miller Act bonds (and that company’s underwriting limits) at the following website: http://www.fms.treas.gov/c570/C570-certified-comp-07-01-14.pdf. Thus, normally the risk of nonpayment on a federal job is relatively low.
However, not all Miller Act sureties offer the same level of protection. According to Section 28.203 of the Federal Acquisition Regulations (FARs), a Contracting Officer can accept a private individual in lieu of an approved corporation to act as an individual surety, assuming that the private individual meets certain requirements. At first glance, The FARs set out some fairly stringent requirements for individual sureties. For instance, an individual must, under oath, provide a list of assets, liabilities, and net worth. Depending upon the type of asset(s) used to support the Individual Surety, assets may be required to be pledged to the government or even placed in an acceptable escrow. On the surface, the individual surety seems to be sufficiently safe, even if not as safe as a corporate surety.
One of the problems with the individual surety arrangement is human error. Ultimately, the decision to accept an individual surety rests with the discretion of the Contracting Officer. If the Contracting Officer fails to conduct the required due diligence on the individual surety, the payment guaranty might only be as good as the piece of paper the bond is written on. And, without a surety to sue, a subcontractor is not left with a lot of options. For instance, courts have made it clear that a Contracting Officer (or the Government) cannot be sued for failing to properly investigate an individual surety.
Consequently, it is important for a subcontractor to do its own due diligence when deciding how or whether to bid a federal job. First of all, it is important to realize that not all federal sureties are created equal. Consequently, a subcontractor should ask to see a copy of the bid bond for every contractor to which the subcontractor bids. The bid bond will indicate if the contractor is using an approved corporate surety or an individual surety. Secondly, and particularly if you are providing bids to a smaller, less established general contractor, you may want to consider conditioning your bid on the use of a government approved corporate surety. If a subcontractor submits its bid to a general contractor (without conditioning the bid as mentioned above) and its bid is used by the awarded prime contractor, the ability to refuse to enter a subcontract may be limited by promissory estoppel. Also, it is important to recognize that individual sureties are the exception and are often used by a prime contractor that has been unable to qualify for bonds from the government approved list of corporate sureties. Consequently, a subcontractor should be more concerned signing up with a prime that is unable to secure traditional bonding. The short, but valuable lesson to subcontractors is to not assume the prime contractor to whom it is submitting a bid is using an approved corporate surety. The perils of relying on an individual surety moved from the theoretical to the actual, with the recent bankruptcy filing of the controversial individual surety, Edmund C. Scarborough.