Subcontractor’s Provision of Bonds OK with GAO—But Watch Out for Affiliation

Small prime contractors often have difficulty securing necessary bid, performance and payment bonds for federal government contracts–especially in the construction industry, where payment and performance bonds are typically required.  Not surprisingly, small primes often turn to their larger subs to secure the necessary bonding.

A small prime’s reliance on its subcontractor for bonding was recently put to the test in a GAO bid protest.  Fortunately for small primes everywhere, in GAO Protest of Shaka, Inc., B-405552 (Nov. 14, 2011), the GAO held that the subcontractor’s role in the bond process did not render the bond defective.  But small primes and their large subcontractors shouldn’t pop the champagne for a celebration, because subcontractor bonding assistance can still increase the risk of ostensible subcontractor affiliation.

The Shaka decision involved an Army Corps of Engineers solicitation for bridge work in Tennessee.  The Solicitation required bidders to supply a bid bond from an acceptable surety.  Shaka, Inc., submitted a bid bond on the appropriate form with Shaka listed as the principal.  Shaka also submitted a letter stating that Joseph B. Fay Co. had assisted Shaka in obtaining the bond and would serve as a major subcontractor on the project.  The Corps rejected Shaka’s bid as nonresponsive, stating that it conditioned the surety’s obligation on a subcontract relationship between Shaka and Fay.

Shaka filed a GAO bid protest, challenging its exclusion.  The GAO held that the bond was proper on its face and that the accompanying letter “simply advised the agency that it was obtaining its bid bond . . . because of its subcontractor’s relationship with that surety.”  The GAO noted that the letter did not alter the surety’s obligation to the government and did not allow the surety to avoid liability on the bond in the event Fay did not wind up as a subcontractor to Shaka.  Under these circumstances, the subcontractor’s role in providing bonding assistance did not cause the bond to be defective.  The GAO sustained the bid protest.

This does not mean that receiving bonding assistance from a subcontractor is completely without risk.  The GAO does not have jurisdiction to evaluate size matters, and did not address the question of whether the bonding assistance, coupled with Fay’s large role on the contract, created ostensible subcontractor affiliation problems.  The SBA’s Office of Hearings and Appeals has previously held that bonding assistance is a risk factor for ostensible subcontractor affiliation (though not, by itself, determinative of ostensible subcontractor affiliation).

In this case, it would have been interesting to see what the SBA would have said if the relationship between Shaka and Fay had been the subject of an SBA size protest.  Fortunately for Shaka, there is no indication in the GAO decision that its size was ever challenged.

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