‘Illusory or Insufficient’ Assets Pledged by Individual Sureties
Can Be Catastrophic to Subcontractors or Suppliers
CHANTILLY, VA. — A coalition of key construction industry organizations urged the administrator for the Office of Federal Procurement Policy to require that assets pledged by an individual surety are real and readily available by modifying part of the Federal Acquisition Regulation requirements.
The coalition — composed of American Subcontractors Association, American General Contractors of America, Design Build Institute of America, Independent Electrical Contractors, National Association of Surety Bond Producers, National Electrical Contractors Association, Sheet Metal and Air Conditioning Contractors’ National Association, and The Surety & Fidelity Association of America — warned that “a determined and unscrupulous individual surety can too readily pledge assets that provide only illusory or insufficient protection.”
“In today’s Federal procurement arena, the typical contracting officer has too many contract award and contract administration actions ongoing simultaneously and too few supporting staff resources to adequately challenge the focused efforts of an unscrupulous individual surety determined to game the system,” the coalition members wrote in the Feb. 10 letter to OFPP Administrator Anne Rung. “Feeling the pressure to move forward with a procurement, the contracting officer may be willing to cut short the necessary due diligence to protect the government, especially if the exposure to the Government is relatively remote. A payment bond from an individual surety that provides only illusory protection, however, can easily result in a catastrophic loss to a subcontractor or supplier even on the smallest contract.”
The coalition noted that the current coverage of the Government-wide Federal Acquisition Regulation (FAR) Subpart 28.2 (Sureties and Other Security for Bonds) provides the contracting officer guidance, but implementation can be compromised by the severe challenges faced by even the most seasoned construction contracting officer. “The core challenge for the contracting officer relates to verifying the existence of and assessing the value of the assets being pledged by the individual surety in support of the surety bonds being furnished to the Government,” the coalition wrote. “Those assets deemed ‘acceptable’ under FAR 28.203-2(b)(3) and (b)(4) include stocks, bonds, and real property owned in fee simple. The contracting officer faces several challenges in determining if the ‘acceptable assets’ actually exist and can be readily liquidated to pay valid claims against a payment bond.”
The coalition noted recent instances in which contracting officers have accepted individual sureties backed by assets that subsequently turned out to be illusory or unacceptable. In United States ex rel. J.Blanco Enterprises v. ABBA Bonding, Inc., ABBA claimed to have a net worth of over $126 million. The General Services Administration accepted the individual bonds, although no assets were placed in escrow for the benefit of the government. ABBA eventually filed for Chapter 11 bankruptcy in the Southern District of Alabama. In another example, Edmund Scarborough, the owner of IBCS Fidelity, another individual surety, filed for bankruptcy in Tampa, Fla. ICBS issued countless individual surety bonds on federal, state and private construction projects using suspect assets. The individual surety previously had listed $4.5 million in assets and $16.2 million in assets; IBCS had used a commodity, mined coal waste, which it valued at $191 million, to back its individual surety bonds. That mined coal waste was valued at $120,000 in the bankruptcy filing.
The coalition urged that the solution is to modify FAR Part 28.203.2 (Acceptability of Assets) to conform to the existing standards of FAR Part 28.204. “This would reduce the administrative burden on the contracting officer to assess the assets being pledged,” the coalition wrote. “The contracting officer would know that the assets pledged by an individual surety in support of its bonds are real, sufficient in amount, readily available and in the care and custody of the U.S. Government. It would assure the buying agency, on behalf of the taxpayers, that the bid and performance bonds provide reliable protection, as intended by the Miller Act. Subcontractors and suppliers would know that the payment bond provides practical payment protections of last resort for work performed or supplies furnished, as intended by the Miller Act.”
Requirements under the Miller Act are designed to protect the interest of the federal contracting agencies, as stewards of taxpayer funds by requiring bid and performance bonds and the interests of subcontractors and suppliers by requiring payment bonds, which provide such downstream parties payment protection of last resort for work performed and supplies furnished.
SMACNA, an international trade association representing 4,500 contributing contractor firms, is dedicated to promoting quality and excellence in the sheet metal and air conditioning industry. SMACNA has national offices in Chantilly, Va., outside of Washington, D.C., as well as on Capitol Hill. Visit www.smacna.org for more information.
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