Today we received an e-mail from a General Contractor that is contemplating requiring performance and payment bonds from its sub contractors. The contractor did some research and wanted to know how to prevent surety bond fraud. The following is our response:
I am a firm believer in bonding subcontractors, and not just because I make my living selling bonds. Surety is a good prequalification mechanism and provides a good way protect a GC from having to pay for the same thing twice. Require both Performance and Payment bonds, the cost is usually the same and the payment bond is the third party guarantee that all suppliers will be paid. There have been some instances of fraud, and even more common, is providing bonds from Surety Companies that have nothing of substance behind them. There are some simple steps you can take to make sure you are getting the protection you are paying for.
1. Make sure the Surety is on the Department of the Treasury’s Listing of Approved Sureties http://www.fms.treas.gov/c570/c570_a-z.html. require this in your specifications. This is a list is sureties that are eligible to provide bonds to the Federal Government.
2. On your bond form, require the phone number of the surety company, and the license number of the surety agent that signed the bond as attorney in fact. You can call to verify the bond and most States have an on-line system to look up the license number of the agent that acted as attorney in fact. Or,
3. Send the sub bonds to your surety agent and have them verify the validity of the bond. We represent a few GC’s that do just that. While we have not found bogus bonds, we have found some bonds that were not correctly executed or were on forms that provided less coverage than we would like to see.
While there are some instances of bond fraud, I do not believe it is a widespread problem.