Monday, February 6, 2012

Bonding Costs

A "bond", according to FAR 28.001, is a written instrument executed by a bidder or contractor (the "principal"), and a second party (the "surety") to assure fulfillment of the principal's obligation to a third party (the "obligee" or "Government") identified in the bond. If the principal's obligations are not met, the bond assures payment to the extent stipulated, or any loss sustained by the obligee. The types of bonds are as follows:

  • Advance payment bond - secures fulfillment of the contractor's obligation under an advance payment provision.
  • Annual bid bond - a single bond furnished by a bidder, in lieu of separate bonds, which secure all bids (on other than construction contracts) requiring bonds submitted during a specific Government fiscal year.
  • Annual performance bond - a single bond furnished by a contractor, in lieu of separate performance bonds, to secure fulfillment of the contractor's obligations under contracts (other than construction contracts) requiring bonds entered into during a specific Government fiscal year.
  • Patent infringement bond - secures fulfillment of the contractor's obligations under a patent provision.
  • Payment bond - assures payments as required by law to all persons supplying labor or material in the prosecution of the work provided for in the contract.
  • Performance bond - secures performance and fulfillment of the contractor's obligation under the contract.

Bonding costs arise when the Government requires assurance against financial loss to itself or others by reason of the act or default of the contractor. They arise also in instances where the contractor requires similar assurance. Included are such bonds as bid, performance, payment, advance payment, infringement, and fidelity bonds.

Bonding costs are generally allowable. According to FAR 31.205-4, costs of bonding required pursuant to the terms of the contract are allowable (although the costs must still meet "reasonableness" criteria). Costs of bonding required by the contractor in the general conduct of its business are allowable to the extent that such bonding is in accordance with sound business practice and the rates and premiums are reasonable under the circumstances.

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