Jump to content

Defaulting an 8(a) contract


Recommended Posts

Does anyone have experience defaulting an 8(a) contractor? My contractor is either going to dissolve the corporation or declare bankruptcy. No one (including the SBA) seems to know who is responsible for seeing that the contract is completed. Does anyone know if SBA should be finding me a replacement contractor, or if I just need to deal with the surety? The other issue is that this construction contract has a one-year warranty. Will we go directly to the surety for the next year for all warranty items? Thanks!

Link to comment
Share on other sites

Does anyone have experience defaulting an 8(a) contractor? My contractor is either going to dissolve the corporation or declare bankruptcy. No one (including the SBA) seems to know who is responsible for seeing that the contract is completed. Does anyone know if SBA should be finding me a replacement contractor, or if I just need to deal with the surety? The other issue is that this construction contract has a one-year warranty. Will we go directly to the surety for the next year for all warranty items? Thanks!

Yes, I've had experience with several 8(a) contract defaults when I was with the Mobile District Corps of Engineers back in the 1990's. We generally coordinated with the SBA but we dealt directly with the Surety to arrange to get the project completed.

I sense that this may be your first default of a construction contract. They can be tricky, especially when dealing with an 8(a) situation. From my experience, the SBA did not have a clue as to how the process of completing the project works. The SBA also may not understand the urgency required to get the project restarted and completed. The Surety often doesn't act like it but they are responsible for all delay and other damages to the government in getting the project completed. A bond isn't "insurance". The Bonding company requires that the contractor indemnify the surety for any losses it incurs. As the clock ticks, the contractor is on the hook, often covering losses with the owner's personal assets that it had to pledge to obtain the bond in the first place. So prompt action on our part is absolutely essential. We generally had to prod the surety to finalize the arrangements to complete the project. The SBA certainly doesn't have the same sense of urgency or the skills that the surety has to make these arrangements.

The Surety most often found a GC type subcontractor to complete the work and we negotiated a Takeover Agreement. Sometimes the Surety managed the work directly and arranged to keep the existing subs. That was when the job was almost complete.

in the case of a Takeover Agreement, we informed the Surety up front that the Surety would be liable for LD's at the end of the job. Once, we collected L.D's up front and established a new contractual completion date and maintained the established LD rate in the contract in order to collect damages in the event that there are unexcused delays in meeting that new completion date.

Occasionally, a Surety just wanted to get out from under the hassle of completion altogether. In those cases, the Surety approached the Government to see if we would accept a new general contractor and a new Surety/bond to complete the project. If we agreed, then we negotiated a Tender and Release Agreement with the surety and the new firm. It was important to ensure that the original surety retained responsibility for anything that the Takeover contractor and its Surety might not take responsibility for, such as latent defects in the original work. I can't recall all the details as the last time I did this was 17 or 18 years ago. I know that we negotiated a new contractual completion date into the Tender and Release Agreement. We collected liquidated damages (LD's) up front, at the time the Tender and Release was executed for the unexcused portion of the delays between the previous contract completion date and the new date.

When a Tender and Release was involved, we issued a new contract to the new contractor entity and obtained new bonds.

The previous contract was kept administratively open to cover the possibility of problems uncovered in the original work by the new contractor.

The answer to your final question is who you deal with on warranty issues depends upon the terms of the agreements and who finishes the work. This is something that you will have to hammer out with the Surety and clarify in the Agreement.

In your case, it is important that you dot all the i's and cross all your tees in the actual default and move swiftly to mitigate delays in getting the Takeover Agreement or Tender and Release agreement in place. This is because the Surety is on the hook for liquidated damages and any other Government damages and we want to minimize the cost and time involved, for everyone's sake. We also want to minimize weather damage to unfinished work and to protect materials and supplies from theft or storage damage.

And NO, before you ask - to the best of my recollection, the completion contractor didn't have to be another 8(a) firm. I was the negotiator but worked directly for the KO and worked closely with our attorney throughout the process. There were always negotiations and revisions to the proposed terms before we settled with the Sureties.

Link to comment
Share on other sites

Thanks so much, Joel. Yes, you are right. This will be my first Termination where we have a surety involved. It sounds ugly! :)

Naw, its actually kinda fun, but challenging to think of all the possible pitfalls! Good luck.

Link to comment
Share on other sites

Guest carl r culham

I would offer that in my view SBA must be more involved than what you note. I suspect that in current times with SBA's reduced staffing and lack of corporate knowledge on such issues you will need to lead the horse to water.

In truth SBA is the prime. I have had the experience where SBA simply replaced their "sub" but this can get very detailed, confusing and requires a great deal of cooperation. I suspect these days of tripartite agreements, automated systems for doing and reporting contracts, etc. would make this option even more difficult. Current references that you should review - 13 CFR 124.515 and 13 CFR 124.518.

I also had the experience where SBA 8(a) and their Surety Guarantee Programs worked with the surety and in the end the surety used the original 8(a) firm as "their" contractor to successfully complete the work with little transition effort.

These two examples are provided to note that there are many options available for consideration in getting the work done that you and SBA SHOULD be discussing. The surety might be the end result but does not have to be.

Link to comment
Share on other sites

Guest Vern Edwards

See FAR 52.219-11, Special 8(a) Contract Conditions (FEB 1990), paragraph ( c):

( c) Except for novation agreements and advance payments, delegate to the _________ [insert name of contracting agency] the responsibility for administering the subcontract to be awarded hereunder with complete authority to take any action on behalf of the Government under the terms and conditions of the subcontract; provided, however, that the _________ [insert name of contracting agency] shall give advance notice to the SBA before it issues a final notice terminating the right of a subcontractor to proceed with further performance, either in whole or in part, under the subcontract for default or for the convenience of the Government.

See also SBA SOP 80 05 3A, 8(a) Program Standard Operating Procedure, April 11, 2008:

77. How Are Contract Terminations Processed?

a. Contracts may be terminated for default (T4D) or for the convenience (T4C) of the Government pursuant to the clauses included in the contract, SBA should attempt to provide the participant with appropriate management and technical assistance. If the participant becomes delinquent in the performance of a contract, or in making scheduled deliveries, the participant should request that the administering activity extend the delivery or performance schedules so as to permit the concern to perform the contract.

b. Termination for Default (T4D):

(1) A decision to terminate a specific 8(a) contract for default (T4D) is made by the procuring activity contracting officer in cooperation with the appropriate SBA District Office.

(2) The contracting officer must advise the ADD/8(a)BD in writing in advance of the intent to T4D the contract.

(3) The SBA District Office may provide the participant with appropriate management and technical assistance to assist in

preventing the T4D and advise the contracting officer of this effort. If the contracting officer believes reasons for termination continue

to exist, after consulting with SBA, he or she may terminate the contract for default. SBA will then make efforts to locate another

participant qualified to complete the subcontract. Negotiations will be conducted, as appropriate, with the procuring activity and

the alternate participant. If a qualified alternate participant cannot be located, or negotiations for completion of the contract cannot be

agreed to, the unperformed part of the defaulted contract will be returned to the procuring activity for re-procurement. SBA is not

liable for any termination costs or re-procurement costs. However, the defaulted participant is liable for such costs pursuant to the

default clause of the contract.

(4) On bonded contracts, concurrence of the surety must be obtained prior to terminating the initial contract. The replacement

participant must provide bonding for the amount of the new contract.

(5) In lieu of a T4D, SBA may request that the procuring activity consider terminating the contract for convenience at no cost to

either party.

(6) Where a contracting officer demonstrates that an 8(a) contract will otherwise be subjected to a T4D, the Administrator may authorize another participant to complete performance on the contract and in conjunction with the procuring activity, permit novation of the contract. See 13 CFR 124.515.

Link to comment
Share on other sites

I would offer that in my view SBA must be more involved than what you note. I suspect that in current times with SBA's reduced staffing and lack of corporate knowledge on such issues you will need to lead the horse to water.

In truth SBA is the prime. I have had the experience where SBA simply replaced their "sub" but this can get very detailed, confusing and requires a great deal of cooperation. I suspect these days of tripartite agreements, automated systems for doing and reporting contracts, etc. would make this option even more difficult. Current references that you should review - 13 CFR 124.515 and 13 CFR 124.518.

I also had the experience where SBA 8(a) and their Surety Guarantee Programs worked with the surety and in the end the surety used the original 8(a) firm as "their" contractor to successfully complete the work with little transition effort.

These two examples are provided to note that there are many options available for consideration in getting the work done that you and SBA SHOULD be discussing. The surety might be the end result but does not have to be.

Good luck getting SBA to take the lead or to do it quickly but they did work with us . Generally, the Surety is on the hook, so has the risk of liability, plus hires people to handle these affairs for construction contracts.

Yes, the original contractor might be retained to complete the job, if their only problem is financial.

If performance is also a problem, then that might not be the solution decided upon by the Surety and government, including the SBA. Sometimes, the SBA found a replacement and sometimes the Surety found a new firm.

Link to comment
Share on other sites

Guest
This topic is now closed to further replies.
×
×
  • Create New...