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Case Shows 'Trust but Verify' an Important Guiding Principle for Suppliers, Subs

A famous quote from the Cold War era, “Trust but verify,” is back in fashion on Capitol Hill and in many business instances, as many circumstances continually dictate its prudence. A recent fraud case out of Minnesota related to a public works project covered by the Minnesota Little Miller Act is a great example of the pertinence of this quote.

Scott County, MN authorities charged Gerard Roy on five counts of forgery, alleging he forged bond documents, including the payment bond, designed to protect subcontractors and material suppliers in the event of non-payment. Roy, of RSI Associates Inc., prepared the documents in question to win a contract on a government project last summer. Various subcontractors continue to wait on payments related to the project even though the municipality where the work was conducted (Hastings, MN) paid RSI in excess of 0,000 for cement and electrical work.

“The travesty in this case, is that what is considered ‘normal’ protocol for subcontractors and material suppliers—obtaining a copy of the bond and assessing the rating of the bonding company—most likely would not have uncovered this fraud,” said Chris Ring, of NACM's Secured Transaction Services. “An additional protocol—contacting the bonding company to assure the bond covers the related project—could have been completed to potentially uncover this fraud as well.”

Ring notes that fraud cases such as this are the exception rather than the rule. Business norms aside, a subcontractor or a material supplier on this type of project would best be served by assuming the potential of a worst-case scenario exists. “This exceptional case could result in a write-off, as the government will likely shield itself from responsibility related to this fraudulent act.” - Brian Shappell, CBA, CICP, NACM managing editor

Additional PA Change to Affect Suppliers and Subs Plans Now

December 31, 2014

Construction material suppliers and subcontractors in Pennsylvania must be mindful of a second set of significant changes to mechanic’s lien requirements passed in 2014, ones that make the state a “Notice to Order” one, even though they don’t go into effect for two years. Granted, plenty of debate exists regarding whether Pennsylvania’s newest changes will be a net-positive or negative.

The switch to a Notice to Owner state will create a central, Internet-based directory for Notices of Commencement, Notices of Furnishing, Notices of Completion and Notices of Nonpayment, according to an analysis released in late December by frequent NACM contributor Jim Fullerton, Esq., principal at Fullerton & Knowles, PC. The change goes into effect in full on December 31, 2016, and could prove to be a bit of a double-edged sword in his estimation:


STS, ASA, Industry Awaits Response of Protest Against Texas Municipality's Bond Waiver Plan

October 24, 2014

Officials from the City of Kilgore, TX have gone quiet since opposition came in from the construction industry to their plan to waive bond requirements on a baseball complex. Chris Ring, of NACM’s Secured Transaction Services, said the plan to reduce costs by skirting obligations of a surety bond on such projects is about accountability and providing some kind of path toward payment when a problem arises.

“In Texas, once the general contract price exceeds $ 25,000, the general contractor is required to post a payment bond as non-payment relief for subcontractors and material suppliers. However, public agencies and general contractors can ask that the requirement for the payment bond be waived,” Ring said. “When the waiver is granted, downstream subcontractors and suppliers have no relief in the event of non-payment.  Just because a payment bond should be in place for a public project, doesn’t mean that it will be placed.  It’s critical that material supplier and subcontractors ask for and obtain copies of payment bonds, to assure they exist.”


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