|For Immediate Release
March 20, 2012
Contact: Charlotte Sellmyer, 202-225-3951
Statement of Judiciary Committee Chairman Lamar Smith
Full Committee Markup of
H.R. 3534, the “Security in Bonding Act of 2011”
Chairman Smith: Today the Judiciary Committee continues its effort to restore the financial security of our country with consideration of H.R. 3534, the Security in Bonding Act of 2011.
This bill protects the federal government from financial loss as it improves the effectiveness of surety bonds contractors must post when they perform construction projects for the United States.
Also, this bill protects small business subcontractors and enhances the financial security of the United States.
The bill amends federal acquisition law to require individual sureties to post only low-risk collateral to back up their bonds. If the prime contractor defaults, the government and subcontractors will have recourse to real, stable, valuable assets to make them whole.
The Miller Act, enacted in 1935, requires a contractor to obtain surety bonds in favor of the government when the contractor undertakes a construction job worth more than $150,000. These surety bonds protect not only the United States but also subcontractors whom the prime contractor hires.
Unlike in the private sector, subcontractors on federal projects have no mechanic’s lien rights; surety bonds are their sole protection.
A bid bond assures the federal contracting officer that the contractor bids in good faith and will complete the job if it is the winning bidder.
Similarly, a performance bond guarantees the United States that the contractor will not walk away from the job even if, for instance, the contractor found a more lucrative opportunity elsewhere.
The Federal Acquisition Regulation (FAR) currently allows a contractor to obtain a surety bond through a corporate surety or an individual surety. Alternatively, a contractor may deposit low-risk collateral, like T-bills or other cash equivalents, with the government covering the project cost.
Corporate surety companies are regulated by the Treasury Department, which requires the sureties to be sufficiently funded in an amount over the risk of default on the bonds they underwrite. But individual sureties are not approved by the Treasury, and they may pledge collateral whose value may fluctuate. For example, the FAR allows an individual surety to pledge stocks and bonds or real property.
The lax collateral requirements for individual sureties have seriously harmed subcontractors and the federal government.
At a hearing on this bill in the Courts, Commercial and Administrative Law Subcommittee a few weeks ago, Jeanette Wellers, the President of a minority-owned construction company in Colorado, testified that she lost $100,000 because the prime contractor’s individual surety bond was backed by valueless assets.
The federal government cannot afford to be left in the lurch because an individual surety bond proved to be worthless. American taxpayers deserve a government that acts carefully and with fiscal responsibility when it spends their money on construction projects.