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The Surety Bond Blog

18
Jul
2013

What is the Security in Bonding Act of 2013 and why we should care

Passing a new bill through the Congress is not an easy task, but it seems that the Security in Bonding Act of 2013, also known as H.R. 776, has good prospects of making it. The previous act, the Security in Bonding Act of 2012, known as H.R. 3534, managed to pass through the U.S. House of Representatives, paving the way for the Act of 2013 by introducing the importance of this legislation.

What is the H.R. 776 and why is it needed? 

Why the H.R. 776 is so important would be a reasonable question in this situation, and its answer lies mainly in the area of construction bonding. The new legislation would play a substantial role in ensuring the homogenization of the rules by which the federal contractor’s obligations to the federal government are managed. This would mean that a construction company that has already received the approval of the U.S. Treasury would have to obtain a corporate surety bond or would have to provide a proof for sufficient assets during the construction process. Making the bonding process a more thoroughly regulated requirement will be of immeasurable help in preventing incompleteness of federal construction projects.

Why are contract surety bonds important?

In the public works construction field, the three most common contract surety bonds are bid bonds, performance and payment bonds. They have a crucial role in ensuring the completion of contractors work on public projects, as they are a sort of prequalification and assessment of contractors that provides information on their capacity to fulfill their contractual obligations. Through such surety bonds, the surety bond company guarantees to the federal government (the obligee) that the contractor in question (the principal) is able to meet the requirements of the contract. Thus, the underwriting of surety bonds is a form of credit given to contractors and is a crucial safety net ensuring the successful completion of federal construction projects in case of contractor’s default or inability to perform the work. In this sense, passing the H.R. 776 would be of great benefit to securing the realization of federal construction contracts.

Building site

Building site
Photo credit: *Kicki* / Foter / CC BY-NC-ND

Additional reasons for the Security in Bonding Act of 2013

Passing the H.R. 776 Bill would also be of benefit to the small businesses in the construction arena. As such unified provisions are lacking now, this gives possibilities for misuse of surety guarantees promises that are actually not backed by the needed assets, which cannibalizes the work of diligent small construction companies with proper surety guarantees. The illegal actions are often coming from individual sureties, whose activities are not regulated in any way, that provide fake guarantees for projects and thus lack proper financial backing. The bill would also introduce a change from 70% to 90% in the maximum bond guarantee to sureties in the Preferred Surety Program of the Small Business Administration (SBA).

Existing support for H.R. 776

The Security in Bonding Act of 2013 has already received the wide support of business and surety bond organizations. It was already referred to two Committees – the House Small Business Committee and the Judiciary Committee. It is expected that the bill will be reviewed in the former Committee before the end of summer. There seems to be sufficient support in both committees for the bill to pass. It is likely that the main challenge will be its passing in the Senate since some Senate members doubt the sufficiency of individual sureties to guarantee Congressional action. A new System for Award Managements might be the needed preliminary step before the bill is passed in the Senate. The System will unify the information on suspended or ineligible candidates for federal procurement programs, as well as barred or suspended sureties issuing bid and performance bonds. This might provide the necessary proof for the Senate.

The Security in Bonding Act of 2013 will be a bold and useful step in the direction of better regulation of federal construction contracts and will be of great public benefit. It will have important input in ensuring the completion of projects paid with taxpayers’ money – and this is something that legislators should keep in mind.

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Category: Bid Bonds, Contract Bonds

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