Small Business Contracting: Surety Bond Waivers for Construction Contracts

What GAO Found

Federal law requires contractors executing federal construction contracts that exceed $150,000 to obtain two types of surety bonds: payment bonds, which guarantee that suppliers and subcontractors will be paid for material and work performed under the contract, and performance bonds, which guarantee that the contractor will perform the contract in accordance with its terms and conditions. This law, which is sometimes referred to as the Miller Act, allows for these surety bond requirements to be waived under certain conditions, such as when the contracting officer determines it is impracticable for the contractor to furnish a bond for work performed in a foreign country, or for specified Department of Defense (DOD) and Department of Transportation cost-reimbursement construction contracts. The Small Business Administration helps small businesses obtain surety bonds in instances where a lack of financial strength or experience may create challenges meeting surety bond requirements.

According to officials at DOD and the Departments of Veterans Affairs (VA) and State (State)--the three selected agencies GAO reviewed--there is no tracking mechanism or data source to identify how often surety bonds are waived. However, agency and industry officials noted that waivers are rare. GAO also confirmed that the Federal Procurement Data System-Next Generation (FPDS-NG)--the government's procurement database--does not include information related to waivers to surety bond requirements. Officials from State and DOD stated that although they generally require bonds for all construction contracts, they have used waivers for certain overseas construction contracts--as allowed--when necessary.

Surety bond fraud is one of many types of fraud that can be reported to federal whistleblower hotlines, but surety bond fraud cases reported through the hotlines for the three selected agencies GAO reviewed are rare. An example of surety bond fraud is when a surety bond issuer provides fraudulent information about the assets available to support the bond. According to DOD, VA, and State officials, they would process whistleblower hotline calls related to surety bond fraud the same as other types of fraud, such as claiming false reimbursement costs for government-related travel. Agency officials said that whistleblower cases related to surety bond fraud were rare, based on searches in agency databases. 

Why GAO Did This Study

Surety bonds are issued by providers, such as individuals or surety companies, to ensure that construction projects will be completed as required and that suppliers and subcontractors will be paid if a bonded contractor defaults.

The House report accompanying the National Defense Authorization Act for Fiscal Year 2017 included a provision for GAO to report on the use of surety bonds in connection with federal small business procurement contracts. This report identifies (1) the requirements for obtaining surety bonds, (2) how often surety bonds are waived at selected agencies, and (3) the whistleblower process for reporting fraud related to surety bonds at selected agencies.

GAO researched relevant legislation and regulations, reviewed FPDS-NG data, and interviewed officials at DOD, VA, and State--which together accounted for 81 percent of total obligations on federal construction contracts with small businesses from fiscal years 2012 to 2016. GAO also interviewed officials at the Small Business Administration and industry representatives.