Surety Bond Producers Keep Eye Out For Illegal Waivers
A report from the annual convention of surety brokers and agents
The surety bond industry regularly reminds state and local governments, politely, that public works in all states must involve surety bonds.
That’s the law. And the National Association of Surety Bond Producers, the bond brokers and agents trade group, has been letting state and local officials know, in writing.
The reminder letters are a small but telling part of the surety industry’s ongoing efforts to defend laws and rules requiring bonds. That also helps the industry hold on to its market share. Since last year, the NASBP has been sprucing up the industry’s image with a media campaign under the banner, "Be Guaranteed To Succeed." The campaign and the letters are needed because of inroads by subcontractor default insurance, a competing product, and the tendency of owners to sometimes waive bond requirements.
Robert Shaw, outgoing president of the NASBP, reminded his colleagues in a welcome to the group’s annual convention in Austin earlier this month that his theme has been “sell more bonds.”
Shaw also made a point of thanking the association staff for reminding state and local governments of their obligations under state and local laws and rules.
In addition to project completion guarantees, Shaw said in an interview, surety bonds guarantee payments “and are the only product that provides all the protections.”
Just how often state and local governments waive surety bonds on projects isn’t clear. But when the NASBP staff hears about a bond being waived, it issues a letter explaining the risks and issues raised in violating state surety requirements.
The surety laws on the books in all 50 states are known as the Little Miller Acts, named for the federal law requiring surety protection on U.S. public works.
The Miller Act requires that prime contractors for the construction, alteration, or repair of projects valued at more than $100,000 furnish a completion and a payment bond, according to the U.S. General Services Administration. Federal Acquisition Regulation (FAR) Part 28 requires the bonds only on contracts that exceed $150,000. The payment bond protects subs and material suppliers. Other protections may cover smaller projects.
State surety laws vary. Most states require bonds to cover the full contract value, but there are exceptions. Alabama only requires a payment bond at 50% of the total contract value, according to the website of National Surety Services, an agency.
The NASBP staff refers to the letters it sends out as comment letters. Mark McCallum, the association’s chief executive, said in an interview that state and local officials may not know about surety requirements or what happens if they are violated. So when the association staff hears about a bond being waived, NASBP’s job “is to educate them.”
The letters go out from Martha Perkins, the association’s general counsel. “We’ll put in the actual language of the statute or rule or regulation and say that this basically violates the law and you need to fix it,” she said.
There is another type of educational letter that NASBP sends out. It explains to state and local officials that requiring bidders to supply only bonds from sureties with the highest financial strength ratings restricts the pool of competition of among contractors—and is very likely unnecessary.
For example, a state or local government that insists that contractors provide bonds only from sureties with an A+ rating may not understand that a rating of A- is considered excellent. Opening up the range of bonds, said McCallum, opens the field of competition to more small or minority contractors while still providing a very reliable guarantee.
Some state surety laws or rules do specify that contractors supply bonds of a particularly financial strength rating. A company such as A.M. Best Co., for example, provides a rating (from A+ to D) and a financial size category, according to the Surety & Fidelity Association of America, a trade group.
Financial strength ratings “are very important and we should always be mindful of them,” said McCallum. “But if you reach for the moon you are eliminating the opportunity of many contractors to compete for that work as well as increasing the price.”