Construction Success Story April 2014

by: Smith and Howard

April 28, 2014

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A small but growing commercial subcontractor recently learned that a little due diligence goes a long way in protecting against surety bond fraud. For several decades, the family-owned company had worked relatively small but usually profitable jobs in its local niche. And now it was moving into larger, municipal projects.

By law, the business was required to use surety bonds on these public jobs. The owner had some familiarity with bonds, but he’d never dealt with one of this size or settled on a single provider. So he contacted his financial and legal advisors to help him avoid trouble. That turned out to be a wise move.

Out of the blue

Required by many state, county and local governments, surety bonds are essentially umbrella insurance policies that protect taxpayers in the event that the contractors involved don’t complete the job. Bonds also protect contractors and subcontractors by guaranteeing payment in the event that one or multiple parties go out of business or refuse to pay.

Out of the blue, the construction company owner received contract paperwork from a surety offering quick and easy bonding for the upcoming municipal project. Both of his advisors recommended that, before he signed anything, they perform some due diligence on the provider.

To further protect himself, the contractor requested the surety’s standard forms and documents and asked his lawyer and financial advisor to review them as part of the due diligence process.

A near miss

About a week later, the construction company owner sat down with his advisors. It didn’t look good, they said. For starters, the surety didn’t meet their “three L’s” for bond issuers:

  1. Licensed,
  2. Local, and
  3. Long industry track record.

Turning to the surety’s contractual documents, the advisors noted that most of the language in the agreement was boilerplate. Both agreed, however, that some important provisions were missing and the contractor would have to negotiate amendments, should he decide to move forward.

But then came the kicker. A background check on the surety’s owner revealed that he was a twice-convicted felon who was currently under investigation by state regulators for surety bond fraud. What’s worse, state officials confirmed that the bonding agreement on the table was likely a scam — or at least highly unlikely to provide the needed protections.

On your side

“Well … no harm, no foul,” the construction company owner shrugged as he deposited the dubious surety’s documents in his shredder. He was just relieved that he had the right advisors on his side and had followed their advice.

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