Contracting Officer Rejects Bid from Entity Using “Nonresponsible” Individual Surety

March 19, 2018

In a decision issued by the United States Court of Federal Claims, Anthem Builders, Inc. v United States, 121 Fed. Cl. 24, the Court considered a Contracting Officer’s right to deny a bid on a project based on an entity’s use of an unacceptable individual surety.  Proper bonding is essential, because without a safety net, the government is left with no protection if the contractor fails to meet its contractual obligations.  Under FAR 28.203 an entity can use an individual surety, instead of a corporate surety, for all types of bonds, with the exception of position schedule bonds.  Anthem bid on a government construction project and the bidding package included a bond secured by an individual surety.  The Contracting Officer rejected the bid as “nonresponsible.”

Contractors have been careful about using an individual surety to secure bonds because of the difficulty in verifying assets and the questionable practices of some individual sureties.  Since these problems arise with an individual surety a Contracting Officer is given wide latitude under FAR 28.203(a).  FAR 28.203(a) gives the Contracting Officer the right to find the individual surety “nonresponsible.”  The right of a Contracting Officer to reject an individual surety was cemented in Anthem Builders.  The Court found that even though pursuant to FAR 52.228–15(d), the bond was supported by an individual surety, the Contracting Officer had the right to deny the bid if the individual surety was “nonresposible” and the funds were not guaranteed.

For Contracting Officers, the validation that a bid does not have to be accepted if the individual surety raises severe financial red flags for the project provides some much needed relief and mitigates a common fear of having to accept fraudulent transactions.  Entities bidding on a federal government project should try and obtain bonding from a surety listed on the Treasury Department Circular.  If an entity is using an individual surety as security for the bond, the entity could take steps to avoid Anthems’ fate in this case.  The entity should ensure that the individual surety provides an escrow account where the Contracting Officer has the sole and unrestricted right to draw on the funds, provides proof of unencumbered assets, or provides an Irrevocable Trust Receipt that is issued by an FDIC insured financial institution.