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Small & Emerging Contractors


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HR 3534: Security in the Procurement Process for Subcontractors, Suppliers, & Workers ...

Tuesday, May 15, 2012  

H.R. 3534—Security in the Procurement Process for Subcontractors, Suppliers, and Workers on the Job and Taxpayers’ Dollars

Under current law, construction contractors have to secure their obligations to the federal government when they are awarded a federal construction contract. There are three options for securing such obligations to the federal government. They can obtain a surety bond from a surety insurance company, which is vetted and approved by the U.S. Department of Treasury. In lieu of a bond, contractors can pledge and deposit assets with the federal government until the contract is complete. Only assets backed by the federal government can be pledged. The third option permits individuals to pledge their assets to back the contractor. These individuals are called "individual sureties.” Only individual sureties are permitted to pledge assets not backed by the federal government. In fact, individual sureties are allowed to pledge stocks, bonds, and real property, and are not required to deposit such assets with the federal government for the duration of the contract.

To the extent that individual sureties pledge assets that do not exist, are difficult to verify, or are not readily
convertible into cash to pay the obligations of the general contractor in case of default, everyone on the

project is left unprotected. Experience has shown that if the assets pledged are uncollectible, subcontractors, suppliers, and workers on the job are left with no payment remedy if they are not paid. The federal government is left with unfunded expenses to complete the construction projects. Yet, under federal law and regulations, a contractor pledging assets directly to the federal government is subject to far more stringent rules than an individual, acting for profit, who pledges his or her own assets to back the contractor.

H.R. 3534 is just common sense. The security that stands behind every federal contractor’s obligations to
the federal government should be governed by the same rules. There should be either a corporate surety
bond in place from a company approved by the U.S. Treasury or assets with readily identifiable value

pledged and relinquished to the federal government while the construction project is ongoing. The same rules should apply to the security that any federal contractor must provide to secure its obligations to the federal government.

Small businesses working on a construction project—either as subcontractors, suppliers, or workers on the job—have no control over the general contractor’s choice of security provided to the federal government, but they suffer the most harm financially if the provided security proves illusory. The result of this bill is that small contractors, subcontractors, and suppliers on federal construction projects will know that adequate and reliable security is in place to guarantee that they will be paid.

Federal contracting officers no longer will have to attempt to determine whether the assets that individual

sureties pledge exist and are worth the actual value claimed. H.R. 3534 makes the government procurement process more effective and efficient in a way that saves government resources and taxpayer dollars, with no additional costs.

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