Tuesday, February 7, 2012

Performance and Payment Bonds

Yesterday we discussed the general allowability criteria for Bonding Costs (FAR 31.205-4). Today we want to dig a little deeper into the purpose of performance and payments bonds as well and when such bonds are required.

For construction contracts over $150 thousand, contractors must provide performance and payment bonds before it can begin work. For contracts under $150 thousand but greater than $30 thousand, there is added flexibility in what contracting officers can accept to ensure that a contractor pays its subcontractors and suppliers. Note, the Miller Act set a threshold of $100 thousand but the Federal Acquisition Regulations have a higher threshold (see FAR 28.102-1.a).

Performance bonds protect the Government. The penal amount of these bonds is usually 100 percent of the original contract price but the contracting officer may require additional protection if the contract price is subsequently increased.

Payment bonds protect subcontractors and suppliers. Like performance bonds, the penal amount is typically 100 percent of the original contract price unless the contracting officer determines, in writing, that a payment bond in that amount is impractical. Without payment bonds, subcontractors and material suppliers would otherwise be reluctant to work on Government construction projects, knowing that sovereign immunity prevents the establishment of a mechanic's lien.

Failure to provide acceptable bonds justifies terminating the contract for default but the Government can take less drastic actions such as withholding progress payments.

After contract completion, the contracting officer must withhold final payment if the surety provides written notice regarding the contractor's failure to pay its subcontractors and suppliers.

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