This is the Bonding Company’s worst nightmare…
As a point of reference, you may expect that federal, state and municipal contracts demand a Performance and Payment (P&P) Bond equal to the contract amount. Normally they do. General Contractors working for a private owner, such as the construction of an office building or apartment project, may face the same requirement. This can apply to subcontractors, too.
This area includes all branches of the federal government. Examples: Army Corps of Engineers, General Services Administration, Dept. of Energy, etc. Their contracts are administered following the rules of the Federal Acquisition Regulations (FAR).
Suprisingly, the FAR says that no P&P bond is required on contracts under $150,000.
For contracts $150,000 and higher that require security, there are times when the bond requirement may be reduced below 100% or waived entirely. These include:
- Overseas Contracts
- Emergency Acquisitions
- Sole-Source Projects
If 100% security is mandatory, the FAR lists acceptable alternatives to a P&P bond:
- US Government (investment) Bonds
- Certified Check
- Bank Draft
- Money Order
- Irrevocable Letter of Credit
Here’s another option: For contracts performed in a foreign country, the government can accept a bond from a non-T-Listed surety. (Circular 570) Crazy!
State and Municipal Contracts
The bonding requirements may vary by state, but generally their flavor is similar to federal. They, too, may accept alternative forms of secutity such as an ILOC.
Anything goes. On private contracts, the owner has complete discretion to set the bonding requirements – including no bond needed. Keep in mind, the cost of the bond is added to the contract, so the owner can save some money by not requiring a bond. They may take other precautions to protect themselves. Some examples:
- Require a retainage. These are funds that are held back from the contractor and only released when the project is fully accepted (reduces the risk of Performance failure)
- Lien releases may be required each month to prove suppliers and subcontractors are being paid appropriately (reduces the risk of Payment failure)
- Funds Control / Tripartite Agreement – a paymaster is employed to handle the contract funds (Payment risk)
- Joint checks are issued to the contractor and payees below them – to assure the funds reach the intended parties (Payment risk)
- Physical site inspections to verify progress (Performance risk)
In these articles we talk a lot about how contractors can obtain surety bonds and manage them. But it is interesting to note: A construction company could go forever, performing state and federal projects – and NEVER get a bond. It’s true!
If everyone did this, it would be the surety’s worst nightmare. But in reality, there are financial advantages to using P&P bonds, so bonding usually is the first choice.
Your first choice should be KIS Surety when fast, creative underwriting is needed on bonds up to $10,000,000. We are the national contract bond underwriting department for Great Midwest Insurance Company, a corporate surety with an A-8 rating.
We can help you solve your next contract surety need. Call us now: 856-304-7348
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