Top Five Risks for Set-Aside Contractors

Liberty Surety in Claims

Federal projects are a big deal for small contractors. But the risks can be big, too.

For small or historically disadvantaged businesses, federal projects are often out of reach – in part because smaller contractors don’t always qualify for bonds needed for a federal contract. That’s why set-aside projects are a boon for small businesses – but risk and reward go hand-in-hand. Here are the top five risks facing set-aside contractors.

Just about every contractor likes the idea of federal contracts. There’s a steady stream of new projects, and the invoices almost always get paid on time.

For small or historically disadvantaged businesses, federal contracts are often out of reach – in part because smaller contractors don’t always qualify for the performance or payment bonds required to procure federal contracts.

That’s why set-aside projects are such a vital aspect of federal contracting. It’s a boon for small business concerns (SBCs), and it’s an investment in economic growth for the government.

There’s an upside for sureties too, of course – but not without risk. Read on to learn more about the top five set-aside risks, and steps SBCs could take to avoid running afoul of these common risks.

  1. Default termination.

    An SBC, by definition, has only so many resources. By taking on a federal contract, a smaller contractor’s capabilities could be spread too thinly. Work may fall behind schedule, or the company might fail altogether. This can lead to termination of the SBC by either the government or the prime contractor. If that happens, the surety has to step in to protect the federal funds involved and help move the contract to completion.

    It’s one of the least desirable outcomes for a project, but it’s one of the most common risks facing set-aside contractors. One way smaller contractors could avoid this unhappy ending is to be straightforward and certain that the scope of a new project is within their capabilities and resources.

  2. Limited resources for indemnity.

    Small businesses usually have limited means, so an SBC is often less prepared to repay their surety provider if a loss happens. Reimbursement terms are usually spelled out in a General Agreement of Indemnity (GAI) – but if a small contractor can’t produce those resources up front, are they out of luck? Not necessarily.

    Several special federal programs exist to help SBCs and sureties work together. One example is the Small Business Administration’s Surety Bond Guarantee Program, which helps repay a surety in case of a loss. It’s a powerful tool for small contractors hoping to qualify for federal projects, and an important confidence-builder for the sureties working with them.

  3. Potential for False Claims Act (FCA) lawsuits

    While the FCA is a powerful piece of legislation aimed at reducing fraud and waste, it can also be a minefield for the entities involved in a federal project. If a suit is filed under the FCA, everyone from the fraudulent party to the suppliers, subcontractors, prime contractor, and surety could become entangled – and there could be serious financial penalties involved.

    An example of an FCA-related problem between sureties and set-aside contractors is if the contractor doesn’t meet the criteria necessary to qualify for federal set-aside work. Some of the most common criteria for qualifying SBCs include:

    • Women-Owned Small Businesses (WOSB)
    • Minority Business Enterprises (MBE)
    • Veteran-Owned Small Businesses (VOSB)
    • Or companies in Historically Underutilized Business Zones (HUBZone)

    There are exacting definitions for each of these designations, and small contractors must apply for and prove they fit into a specific category.

    For a smaller contractor, a key to avoiding fraud-related issues is to be diligent about how you set up your business, and honest about how you represent it. Of course, choosing a reputable surety means the surety should perform its due diligence in advance – which could be a way to avoid a problem before it exists

  4. Improper affiliation finding.

    This is a close relative of the issue above. If a set-aside contractor obtains eligible small business status, but was only able to do so because of its affiliation with another company that had additional resources and managerial control, the set-aside contractor may not meet the necessary qualifications as an SBC.

    Affiliations with a larger company can be permissible – but if that affiliation creates an unfair advantage for the set-aside, it’s likely not allowed. These complex affiliation determinations depend on intensive analysis of all the facts and circumstances. But if you obtain status as an eligible set-aside contractor by deliberately misrepresenting your affiliations, it could result in termination, suspension, debarment, and criminal or civil penalties.

    Once again, a way for a smaller contractor to avoid these problems is to be diligent, truthful, and transparent in all business dealings. And because the affiliation question is so complicated, working with professionals who can help sort it all out correctly could be beneficial for SBCs.

  5. Too much time, too little profit.

    Vetting a set-aside contractor to make sure they’re a good fit means expending a lot of time and resources. If the vetting process starts to look more costly than the benefit of doing business together, a surety may need to pass. This is a disappointment for everyone involved.

    One way for SBCs to avoid this disappointment is to prepare as carefully as possible. Make sure you’re ready to take on work as a set-aside contractor. Does your company meet the government-mandated criteria for SBCs? Do you have the resources and skills to complete a project on time and on budget? And are you diligent and transparent about your business structure and any affiliations?

    If you’ve given a confident yes to all these questions, the next step is to work with a surety bond provider with the strength and resources to be not just your surety, but a trusted advisor.

    If you’re a set-aside contractor on federal projects – or you want to be one – get in touch with Liberty Mutual Surety to see how we could work together.

This document is general in nature and is provided as a courtesy to you. Information is accurate to the best of Liberty Mutual’s knowledge, but companies and individuals should not rely on it to prevent and mitigate all risks as an explanation of coverage or benefits under an insurance policy. Consult your professional advisor regarding your particular facts and circumstance. Insurance and surety are underwritten by Liberty Mutual Insurance Company or its affiliates or subsidiaries.

Top Five Benefits of an In-House Claims Team

Liberty Surety in Claims

Here are five reasons why an in-house surety claims team creates a better surety experience

The best surety claims teams combine expertise, efficiency, and clear communication, plus seamless integration with other business teams. So how could you get all you need, all in one place? By choosing a surety that has a dedicated, in-house surety claims team.

There are few constants in the surety industry, but one you can count on is change. The construction industry encounters constant change and it is becoming increasingly challenging to manage associated risks. No matter how careful or experienced a contractor may be, no matter how thoughtfully one plans for a new bonded project; there is the potential for unfavorable results.

If something goes awry during construction of a bonded project, you want to ensure that during the claims process there is alignment in decision-making, keeping in mind the best interests of the owner, contractor, and surety. Finding ways to promptly and creatively respond to actual or potential claims is of paramount importance to surety claims personnel.

In a best-case scenario, the surety claims team will work to recognize opportunities for possible early intervention, which may lead to faster resolution of the underlying problems, thus reducing time and expense factors for the contractor. Trust, responsiveness, and communication – three qualities intrinsic to a great surety claims team!

Read on to see how a fully integrated surety claims team could creatively blend expertise and efficiency, all supported by clear communication.

  1. Seamless Claims Management

    A surety with an in-house claims team has a fundamental difference over one that outsources—collaboration. The synergy among surety experts working together, all under one roof – claims, underwriting, finance, and legal results in a more collaborative surety claims process and, potentially, faster resolution of problems.

    For example, our surety claims team is empowered to make decisions during, and sometimes ahead of, the claims process because they are an integral part of our surety team, not just a liaison between underwriters and contractors.

  2. Deep Industry Expertise

    In the unique world of surety bonds, industry-specific expertise can create a much better surety claims experience. Building a surety claims team that understands both the legal and business aspects of contracting and suretyship requires an ongoing investment in the professionals who manage your claims. Our best advice: always work with a surety willing to make that key training investment in its personnel – so you know that you have knowledgeable and well-rounded experts at the ready when problems arise.

    Liberty Mutual Surety’s in-house surety claims team is able to respond swiftly and reliably to various complex claim situations.

  3. Sophisticated Risk Resources

    The surety industry is all about lessons learned. With every client and every bond, we sharpen our understanding of the risks and challenges facing contractors.

    Of course, much of that institutional strength comes from our ability to leverage expertise between our dedicated claims professionals and our in-house underwriters. As our claims and underwriting personnel consistently share their experiences back and forth, we have developed a sophisticated set of risk control resources for our contractor clients – because the best claim is the one that we successfully worked together to avoid.

  4. Trailblazing Technology

    From data analytics working behind the scenes to a sophisticated online interface for clients, you could benefit from a surety that’s on the front lines of technology.

    Working long days and carrying a number of responsibilities, a contractor’s time is precious. An in-house surety claims teams can help integrate technology into your everyday experience as a client. One company with one network of employees means members of our surety team have access to the technological capability and global strength of Liberty Mutual Insurance.

  5. A Customized Approach

    Whether you are a longtime construction giant or a smaller contractor seeking your first surety bond, your situation is different from every other contractor. Of course, some of the most common claims will likely pop up, no matter who you are – but your goals and challenges are unique, even shifting from one project to the next.

    That’s another reason why an integrated surety claims team is so important. In-house claims professionals are a steady force, not a temporary fix. In addition, some say that the consistent personal connection to a client is even more powerful than cutting-edge technology.

    We hold both technology and the personal connection as top priorities. We combine the two for a customized approach to handling surety claims. With direct access to your claims handler, integrated account teams, and rigorous communication standards, we keep you in the know every step of the way.

Contractors can be more productive when surety claims are closed faster and with better outcomes. If you are ready to work with a surety claims team that combines significant claims expertise with a deep understanding of contracting and the surety industry, get in touch with Liberty Mutual Surety.

This document provides a general description of this program and/or service. See your policy, bond, service contract, or program documentation for actual terms and conditions. Insurance and surety are underwritten by Liberty Mutual Insurance Company or its affiliates or subsidiaries.