History of Surety Bonds
More than 100 years ago, the federal government became alarmed with the high failure rate of private firms performing public projects, (construction has the second highest failure rate of any business with 57% closed by the end of year four and 70% closed by the end of their seventh). It discovered that the private contractor was often insolvent when the job was awarded, or became insolvent before the project was finished. Accordingly, the government was left with unfinished projects and the taxpayers were forced to cover the additional costs arising from the contractor's default.
As with many complex endeavors involving risk, the need existed for a third party to assure the performance or obligations of one party to another, a concept that actually dates back to the early days of Rome with individuals backing the performance of others. Because the lifecycle of a business is generally longer than that of an individual, corporate sureties emerged, first The Guarantee Society of London in 1837 and then in the United States in 1880, (United States Fidelity and Casualty Company of New York).
Congress adopted this "third party" assurance by passing the Heard Act in 1894 which authorized the use of corporate surety bonds to secure privately performed federal construction contracts. In 1935, the Heard Act was replaced by the Miller Act, (40 U.S.C. $270A et. Seq.), which remains the statutory provision requiring performance and payment bonds on federal construction projects in excess of $100,000. Most states have since enacted similar legislation requiring surety bonds on public works projects, i.e. “Little Miller Acts. “ In Texas, the Governing Statute is Chapter 2253, Public Work Performance and Payment Bonds.
Surety bonds remain an integral part of government and commerce and continue to make it possible for the government to use private contractors on publicly funded construction projects. Under a competitive sealed bid, where the work is awarded to the lowest responsive bidder and a bond is in place, political influence is not a factor, the government is protected against financial loss if the contractor defaults, and certain laborers, material suppliers and subcontractors each have a remedy if they are not paid, all without consequence to the taxpayer.