Why Do Government Projects Require Surety Bonds?

In today’s blog we discuss the necessity of surety bonds throughout modern day American construction.  But let’s go back a little further than that.  The construction industry has been around since before Antiquity, when humans engineered roads and infrastructures to make traveling and living easier.  The need for a surety’s assurance, dates back to 2,750 BC, when a farmer was called to war.  A second farmer agreed to work his fields in his absence.  A third farmer guaranteed that the second farmer would follow the contractual obligation.  This was all found on a tablet from the Mesopotamian time period.

AMARAPURA, MYANMAR - DEC 09, 2013: Plowing rice fields with an ox team. The farmers plows the land ancient method using oxen.

Fast forward to current times, and we see that the US federal and state government have spent over $400 billion on infrastructure projects.  Just like the farmers, the contractors required a third party to vouch that they would complete the task.  For any federal project over $150,000, this contractual arrangement is not voluntary as it was for our Mesopotamian farmer friends.

A Brief History of Contractors in the United States

During the booming Industrial Age of the late 1800s, America was flourishing.  The Rockefellers, Carnegies and many other tycoons were building up America with their skyscrapers, railroads and other infrastructural projects.  Many small contractors jumped on this economic boom.  But as the US government hired contractors, many were not able to complete the job.  They often bit off more than they could handle.  Sadly, these projects were often meant to benefit the public.  Citizens increasingly found themselves inconvenienced and frustrated that their tax dollars had been wasted due to the negligence of the contractors.  An additional byproduct of the incomplete projects was that many who worked on the projects were not compensated for their time or supplies.  Additionally, subcontractors and suppliers found that they were not able to seek compensation, because placing a lien on government property was not allowed.  These situations forced the government to take a long, hard look as to how government projects were to be awarded.  The solution suggested was to prequalify contractors.

Going the legislative road: The Heard and Miller Acts

Enter the Heard and Miller Acts.  In 1894, Congress passed the Heard Act, which acted as a protection against incompetent or faulty contractors.  It put the prequalification process in the hands of a surety bond producer (similar to our third farmer).  It was, and is, the surety bond producer’s main role to evaluate the contractor and deem them fit or unfit for the government project.  The surety bond producer evaluates the contractor’s financial records to assess their competency. It also protects subcontractors and suppliers, by allowing them to file a claim in case a contractor defaults on the payment surety bond.  It was modified in 1935 when Congress passed the Miller Act, which required contractors to purchase a performance and payment bond for federal projects.

Individual States quickly saw the benefits of requiring contractors to be bonded and passed The Little Miller Acts, which have further conditions specific to each state.  The benefits of the Heard, Miller and Little Miller Acts are that there have been less contractor defaults, the reliability of contractors has improved and a more efficient construction industry has emerged.

We here at GotSuretyBonds.com are proud to carry on the tradition of our third farmer, helping contractors get bonded for government jobs and assessing and protecting their companies.  If you’re in need of a surety bond, contact us today to start your journey to a more successful and profitable business.

 



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