Wharton Surety Bond Blog
According to the Surety & Fidelity Association the Federal Government can do more to help small contractors
by Jeff Longenecker on 01/18/12
SFAA testified yesterday before a panel of the U.S. House Armed Forces Committee regarding the challenges that small and midsized businesses face in doing business with the Department of Defense (DOD). The three witnesses were Lynn Schubert, SFAA President, a representative of the Small Business Committee of the National Defense Industrial Association (NDIA) and the Small Business Administration (SBA). Each witness was asked to give a brief statement of the issue and the rest of the hearing was spent in a spirited exchanged between Members of Congress and the witnesses in a question and answer period. The Members on this panel were familiar with procurement and bonding issues for DOD contractors.
SFAA testimony addressed the public policy benefits of bonding federal construction and how DOD can increase the bondability of small and midsize contractors by decreasing the size of its contracts, unbundling contracts, working with us to improve the joint venture and mentor protégé programs so that both large and small contractors have more incentive to participate, and exempting the federal Miller Act bond thresholds from the federal procurement threshold that now are required to be periodically reviewed and adjusted for inflation. That requirement was included in the annual Defense Appropriations bill in 2005 and the Armed Forces Committee would have jurisdiction to help us amend it. SFAA also offered to work with DOD to implement our Model Contractor Development Program ® (MCDP) and noted the success with our current program with the U.S. Department of Transportation. SFAA also urged support for H.R. 3534, the Security in Bonding Act of 2011, the SFAA and NASBP drafted bill to address the problem with fraudulent individual sureties.
Representative Hanabusa (D-HI) stated that one problem with bonding for small contractors is that since the business does not have sufficient capital, she has been told that bonding companies ask for homes and other personal assets as collateral for the bond. These contractors allegedly do not seek federal projects because they do not want to pledge those assets in order to be bonded. The Representative asked SFAA for alternatives to bonding and SFAA asked for the support of the Armed Forces Committee on making the needed improvements to the SBA Bond Guarantee Program. The Representative also asked SFAA for statistics regarding losses on military construction, and statistics on instances where the obligee paid more in recovery costs than the penal sum of the bond. The deputy director for legislative affairs for the SBA was in attendance at the hearing, and we spoke with him about the SBA Bond Guarantee Program. The SBA staff had an outside consultant study the Bond Guarantee Program and the study results are right in line with the changes that SFAA and NASBP have been pursuing. SFAA will follow up with the SBA staff. The SBA legislative affairs staff was interested in a bill that has no apparent opposition, especially if it could go forward on a bipartisan basis.
The testimony of SFAA and NDIA was similar in many respects. Contract unbundling was a common recommendation, and SFAA told the Panel that contract unbundling rules also must apply to construction contracts. A federal appellate court ruled that existing federal unbundling rules do not apply to new construction contracts. In the discussion on unbundling, both witnesses and the Members of Congress brought out both sides of the debate. It was noted that unbundling contracts would allow more small businesses to obtain federal contracts. It also may save money as large general contractors often use many subcontractors, which can result in paying the costs of the overhead for the general contractor and all the subcontractors. If the federal government dealt directly with the smaller contractors, overhead costs arguably would be lower. Some Members of Congress noted, however, that federal contracting officers have shrinking resources and they rely on the general contractor to get an entire project completed properly. If a large project was broken into a number of smaller contracts, the federal contracting staff would have to manage all the parts, which places an additional administrative burden on the DOD and contracting officers in other federal agencies. The Panel seemed to conclude that it needed to weigh the benefits of unbundling vs. ease of administration; if unbundling of contracts would increase small business participation significantly, DOD may need to bear the administrative costs.
While NDIA believed that DOD has a good mentor protégé program, SFAA presented the problems of the differing rules for such programs among all the federal agencies. The lack of clarity and consistency among the programs is a disincentive for large and small contractors to participate in joint venture and mentor-protégé programs. Small contractors are hesitant because they may lose their status as a small contractor in some of the programs because of the involvement of a large contractor or because the bonding for the project is based on the strength of the large contractor. The SBA stated that its 8(a) program might be a model for the agencies. Representative Schilling (R-IL) told other Panel Members that he is going to introduce a bill to address problems with the mentor-protégé programs among the agencies. Representative Schilling also serves on the House Small Business Committee, which would have jurisdiction over that issue. His bill may well contain provisions authorizing the SBA to set standards and rules for such programs in all agencies. SFAA already has been contacted by the House Small Business Committee majority staff to discuss the upcoming mentor-protégé legislation, and we also will follow up with Representative Schilling’s staff.
In the question and answer period, it was noted that small contractors generally believe that DOD thinks that small businesses should play only a small role in DOD contracting. Given the nature and size of DOD projects and their relation to critical national security issues, DOD seems to be risk adverse in letting contracts, and deals with large contractors, viewing small contractors as imposing greater risks in terms of financial stability and performance. While that culture takes time to change, NDIA told the Panel that the current 23% small participation goal for federal agencies needs to be enforced. The SBA stated that under the current Administration, small business participation has improved over the last two years. The Administration now meets quarterly with all the Deputy Secretaries regarding progress on small business participation goals. DOD has made significant progress in increasing participation as contractors and subcontractors. The SBA issues report cards to the agencies and those that do not meet their goals must submit a plan of action. The Small Business Jobs Act of 2010 also added several provisions on contracting, including unbundling provisions and additional provisions for contractors to meet their subcontracting goals. NDIA contended that there is no teeth in the enforcement of small business participation goals. NDIA believed, however, that agencies not meeting their goals should feel it in their budgets.
Federal Spending for Construction Projects
by Jeff Longenecker on 01/18/12
According to the Surety and Fidelity Association of America, it appears as though there will not be much in the way of Federally funded work to go around this year:
Federal Construction Spending Reduced in 2012
Congress completed work on the remaining nine fiscal 2012 appropriations bills for the federal agencies in an omnibus package before it went home last year. The agencies had been operating on continuing resolutions since October 1, 2011, the beginning of the 2012 fiscal year. Overall, Congress acted within the $1.043 trillion dollars agreed to in the deal made last year to cut spending and increase the national debt ceiling under the Budget Control Act (BCA). Most federal agencies will have a cut in funding for construction and renovations in their fiscal 2012 budgets for the last nine months of fiscal 2012. The General Services Administration (GSA) took the biggest hit with a 90% decrease. GSA got only $50 million for construction for the rest of fiscal 2012. GSA had requested $839.60 million, which would have been an increase from its fiscal 2011 budget of $768.40 million. GSA had requested over a billion dollars for fiscal 2011. The GSA budgets for repairs and alterations, as well as building operations, also were cut significantly. The Bureau of Indian Affairs and the federal prison system also took big hits in construction spending. The Department of Homeland Security will delay the consolidation of its headquarters indefinitely. Military construction also was substantially reduced. The annual Military Construction and Veterans Affairs bill that was part of the omnibus bill provides for $13.1 billion in military construction, which represents a $3.5 billion decrease from fiscal 2011. The Veterans Affairs budget provides nearly $590 million for construction of major new projects, which is down 45% from fiscal 2011. The Army Corps of Engineers got $1.69 billion, which is more than the $1.48 billion it requested for construction spending in its 2012 budget. This still is down from $1.79 billion in fiscal 2011.
Marcellus Shale Drilling
by Jeff Longenecker on 01/13/12
To drill a new Marcellus Shale natural gas well in Pennsylvania, the operator must obtain a well permit from the Department of Environmental Protection and post a bond. The bond is a financial incentive to ensure that the operator will adequately perform the drilling operations, address any water supply problems the drilling activity may cause, reclaim the well site, and properly plug the well upon abandonment. The bond amount for a single well is $2,500; a blanket bond to cover any number of wells is $25,000
See More: http://www.pahouse.com/DeWeese/marcellus-shale-docs/drilling-regulations.asp
Marcellus Shale Bonding Rules
by Jeff Longenecker on 01/13/12
A Maryland panel recommended in a report on Monday that the General Assembly impose a fee on gas leases in the Marcellus Shale to fund studies about the impact of drilling in far western Maryland. This may have an effect on the way bond amounts are established. Read More:
Safe Drinking Water
by Jeff Longenecker on 01/13/12
Surety bonds can assure citizens a supply of safe drinking water:
