In many government contracts, but especially construction ones, security is the watchword–security for the Government, that is. To that end, the Government tethers contractors to their bids. Likewise, it demands certainty of performance and payment of subcontractors. In short, the Government doesn’t want a routine building project turning into an imbroglio–or become a monument to unfulfilled visions, like the famously incomplete buildings cataloged here.
For that reason, the Government accessorizes contracts with some fun FAR provisions that allow for deep and dreamless bureaucratic sleep. Here, we’ll first touch on bid guarantees. Then, we’ll proceed to performance and payment bonds–which were first introduced into the government contract canon in the Miller Act.
The first little present that you might find in a solicitation/contract is FAR 52.228-1. This clause removes a traditional, common law contract principle: a bid/offer can be withdrawn anytime before acceptance, thereby inhibiting the formation of a binding contract. In its place, this clause requires the bidder to put up a firm commitment (e.g., a bid bond, certified check, or similar instrument) to prevent the bidder from withdrawing its bid during the solicitation’s acceptance period. As part of the guarantee, the offeror also agrees, if the Government accepts its bid, to execute all contract documents and provide the required performance and payment bonds. Put simply, the bid guarantee locks an offeror down until the Government either accepts or rejects it.
If the winning bidder attempts to back out–or fails to put up required bonds–the Government can unleash the T4D dragon–i.e., termination for default. Aside from the obvious problems attendant with a T4D, there can be an immediate financial impact. Indeed, the bidder is liable for the Government’s cost of acquiring the work that exceeds its bid. And as you might guess, the Government can use the bid guarantee to offset the cost differential.
Construction contracts exceeding $150,000 should contain FAR 52.228-15, the provision covering both performance and payment bonds. Non-construction contracts too can require performance and payment bonds; look for FAR 52.228-16.
Performance bonds protect the Government from, well, the contractor’s non-performance. Typically, the bond’s penal amount must cover 100% of the contract’s price; although, the contracting officer has some wiggle room on the precise amount. But if the contract price increases during performance–say, because of a change order–the bond amount will increase too.
Be aware that a performance bond is a precondition for beginning work. So, ensure that your bond ducks are in a row before your receive the Government’s notice to proceed.
Now, here’s a quirk: if a contract should contain FAR 52.228-15, but the Government forgot to put it in, the bonding requirement nonetheless applies. What!?! Yep, federal courts have held that bonding requirements–whenever required by the FAR–are automatically incorporated into the contract, regardless of their actual appearance in the contract. So beware: if you have a construction contract over $150,000 with the Government, assume the bonding requirements.
While performance bonds protect the Government, payment bonds protect subcontractors and suppliers. In a commercial setting, a subcontractor has certain legal tools to secure payment if it isn’t paid by the general contractor (e.g., a mechanic’s lien). That option isn’t available, however, on Government property. For that reason, contractors guarantee payment to their subs through a payment bond.
Despite its different purpose, the characteristics of a payment bond are very similar to those of a performance bond:
- a payment bond’s penal amount must equal 100% of the contract’s price.
- the Government can increase the bond amount if the contract price increases. (And a payment bond can never be less than the performance bond.)
- a contractor must submit a payment bond before it can begin work.
- payment bond are automatically incorporated into contract where the FAR requires them.
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That’s a small rundown on bid guarantees, performance bonds, and payment bonds. There’s other bonding issues that we could discuss–like how small business can get bonding assistance through SBA’s mentor-protégé program–but we’ll leave that for another day. As for now, bye, bye and buy bonds!