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Payment Bonds For Service Contracts


bob7947

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I'm posting this for a new poster. I originally had "Construction" contracts in the title. It should have been "Service" contracts.

Who has experience in Payment Bonds related to Service Contracts? My background is in Construction Contracts so am asking if anyone has required Payment Bonds related to Service Contracts. Your help and advice is appreciated.

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Additional Information. We have had several Service Contracts were bonds were not required and seem to be experiencing a number of Congressional Inquiries where Subs are not being paid. It has been our procedure to require both Payment and Performance bonds for construction and not requiring them for Serivce. The FAR allows for Payment Bonds for other than construction however if a Payment Bond is required so is a Performance Bond. Does anyone have experience in Service Contracts where you have required both Performance and Payment Bonds?

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Based on some limited experience on requiring bonds on service contract work here are my thoughts?

Annual Bonds ? Note coverage in FAR Part 28 regarding annual bid and performance bonds. You might encounter offerors that have these type of bonds in place however my experience has been where the service contractor has provided separate bonds.

Bid Guarantee ? Highly suggest you require but note FAR coverage of where may not be in the best interest of the Government.

IGE ? Remember to have the costs for bonding included in your IGE. I would error on a higher percentage 3.5 to 4.5% of contract value as experience on my part was that the bonding companies demanded a higher percentage of cost due to the fact that the firms they were bonding were thought to be in the higher risk category due to lack of bond experience by the firms.

Payment provision ? Remember to cover in your contract terms and conditions how the bonding costs will be paid to the contractor. For my limited experience I borrowed the payment terms and conditions from the construction side (found usually in the specifications) and then adjusted for the service contract being used on.

Assistance to offerors ? You might be throwing a curve ball at some offerors who have never had the experience in securing bonds. Can be a lengthy and confusing effort for a newbie. Consider possible longer solicitation period, or some other advance warning to industry that you will be requiring for work of the future so they can start their business processes to secure. Noted especially as your agency may be making this a usual practice and a firm has the where withal to secure annual performance bonds. For small businesses the SBA?s surety bond guarantee program could be a valuable reference ?

http://www.sba.gov/about-offices-content/1/2891

General ? From my experience not much different than administering under a construction solicitation/contract with the biggest issue being that the part of industry that is your usual players may not be familiar with bonding and they will pose many questions. You might experience a higher degree of individual sureties or alternatives in lieu of sureties.

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Guest Vern Edwards

For those not familiar with this issue, here is what FAR says about bonds for other than construction contracts:

28.103 Performance and payment bonds for other than construction contracts.

28.103-1 General.

(a) Generally, agencies shall not require performance and payment bonds for other than construction contracts. However, performance and payment bonds may be used as permitted in 28.103-2 and 28.103-3.

(B) The contractor shall furnish all bonds before receiving a notice to proceed with the work.

( c) No bond shall be required after the contract has been awarded if it was not specifically required in the contract, except as may be determined necessary for a contract modification.

28.103-2 Performance bonds.

(a) Performance bonds may be required for contracts exceeding the simplified acquisition threshold when necessary to protect the Government?s interest. The following situations may warrant a performance bond:

(1) Government property or funds are to be provided to the contractor for use in performing the contract or as partial compensation (as in retention of salvaged material).

(2) A contractor sells assets to or merges with another concern, and the Government, after recognizing the latter concern as the successor in interest, desires assurance that it is financially capable.

(3) Substantial progress payments are made before delivery of end items starts.

(4) Contracts are for dismantling, demolition, or removal of improvements.

(B) The Government may require additional performance bond protection when a contract price is increased.

( c) The contracting officer must determine the contractor?s responsibility (see Subpart 9.1) even though a bond has been or can be obtained.

28.103-3 Payment bonds.

(a) A payment bond is required only when a performance bond is required, and if the use of payment bond is in the Government?s interest.

(B) When a contract price is increased, the Government may require additional bond protection in an amount adequate to protect suppliers of labor and material.

28.103-4 Contract clause.

The contracting officer shall insert a clause substantially the same as the clause at 52.228-16, Performance and Payment Bonds?Other than Construction, in solicitations and contracts that contain a requirement for both payment and performance bonds. The contracting officer shall determine the amount of each bond for insertion in the clause. The amount shall be adequate to protect the interest of the Government. The contracting officer shall also set a period of time (normally 10 days) for return of executed bonds. Alternate I shall be used when only performance bonds are required.

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...General ? From my experience not much different than administering under a construction solicitation/contract with the biggest issue being that the part of industry that is your usual players may not be familiar with bonding and they will pose many questions. You might experience a higher degree of individual sureties or alternatives in lieu of sureties.

Individual sureties were a big headache for us when I was involved with sureties and bonding issues on a weekly basis (in the late 90's). You need to have a good lawyer review them. Most of the proposed individual sureties were questionable or otherwise unacceptable. The IS were generally were "backed" by some specious personal assets.

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Thank you all for your insight/comments. I have read FAR Part 28.103 and although it allows for Payment Bonds for "other than" construciton, I suppose we could approach it the same way as we do when requiring them for construction contracts. It does not appear from the limited information that we are procluded from requiring them when the Government feels the need to protect subcontractors. We have had a number of Congressionals lately with Prime's not paying their subs and all related to Service contracts.

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From my experience I believe the FAR is written the way it is regarding payment bonds when performance bonds are requested is because when a firm applies for surety bonding they become eligible for and are in fact charged as if both are provided. Unless the industry has changed I think you could verify this by asking a bonding expert but to help support my experience note that the premium rate for a surety bond is entered only on the reverse of the required form SF-25, Performance Bond, there is no such block or requirement to include the rate on the reverse of the SF-25A, Payment Bond or for that matter the Bid Bond, SF-24. Essentially they come as a package and if you want the payment bond protection you might as well get the performance bond as the Government is in effect paying for it anyway.

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Guest Vern Edwards
FAR 28.103 should be read in concert with FAR references regarding bid guarantees as well when considering bonding for service contracts to give the full perspecitive. Those references are FAR 28.100 and FAR 28.101.

Carl,

Are you suggesting the use of bid guarantees in negotiated procurements?

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Guest Vern Edwards
Vern - Yes, if the solicitation provides that the Government may award without discussions.

Why? And why only if the solicitation provides that the Government may award without discussions? What if the government reserves the right to award to other than the offeror with the lowest price? Wouldn't the requirement for a bid bond conflict with FAR 52.215-1( c)(3)(v)? "Proposals may be withdrawn by written notice received at any time before award." Wouldn't you need approval to deviate from the terms of the solicitation provision? See FAR 1.401(a), (B), and ( c). See also FAR 15.208(e). Wouldn't you verify the offeror's ability to provide the performance and payment bonds during proposal evaluation? Wouldn't a bid guarantee be an unnecessary expense?

I'm not saying that you're wrong about anything. I recognize that FAR permits the requirement for bid guarantees in negotiated procurements. However, I have never understood the rationale for such a requirement or how it is consistent with the policy permitting withdrawal of proposals at any time before award, a policy that does not apply in sealed bidding. I am hoping that you can explain it to me.

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Why? And why only if the solicitation provides that the Government may award without discussions? What if the government reserves the right to award to other than the offeror with the lowest price? Wouldn't the requirement for a bid bond conflict with FAR 52.215-1( c)(3)(v)? "Proposals may be withdrawn by written notice received at any time before award." Wouldn't you need approval to deviate from the terms of the solicitation provision? See FAR 1.401(a), (:huh:, and ( c). See also FAR 15.208(e). Wouldn't you verify the offeror's ability to provide the performance and payment bonds during proposal evaluation? Wouldn't a bid guarantee be an unnecessary expense?

I'm not saying that you're wrong about anything. I recognize that FAR permits the requirement for bid guarantees in negotiated procurements. However, I have never understood the rationale for such a requirement or how it is consistent with the policy permitting withdrawal of proposals at any time before award, a policy that does not apply in sealed bidding. I am hoping that you can explain it to me.

Not trying to steal Carl's thunder. A bid bond in a negotiated acquisition is primarily useful in having some assurance that the firm has qualified for bonding with a bonding company ("Surety") or a Suerty's agency who actually sells and issues the bonds. It doesnt guarantee that the firm can get a bond, especially if the firm is participating in multiple solicitations. Each firm has some approved bonding capacity. The first awards will eat up that capacity as the firm is issued bonds. By the time your solicitation is awarded, the capacity might be exceeded, plus mods requiring additional coverage on other, active contracts also count against a firm's bonding capacity. So, even if a firm was able to get a bid bond or some letter from from the agency or surety, it doesn't guarantee that that capacity is still available upon award of your contract. Extended delays in source selections often cause firms problems with bonding capacity. I often had firms that would call and advise that our on-going solicitation had tied up their bonding capacity for other endeavors.

As for the effect of the bid bond in a negotiated acquisition, yes the firm can withdraw from the competition before award. The bid bond may be useful to the government after awarding the contract to a firm, in the event that it then wants to withdraw. Not sure of the legal term but the government can "call" the bond if the firm backs out after notification of award to it.

As for the cost of a bid bond, according to contractors and Sueties' local agencies that I used to deal with regularly, the bonding companies or their agencies often waived the cost of the bid bond for construction companies that they regularly dealt with. I bet they wouldn't waive the fee for new clients on service contract competitions, though.

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Vern - Sensible or not I think you are overlooking FAR subpart 28.101-1(a) and its last sentence.

As Joel has already noted and based on practical experience where the situations he has generally covered I have had direct experience with, proceeding with a procurement that requires performance or performance and payment bonds without requiring the bid bond is in general not in the best interest of the Government. By experience having the bid bond provides a very distinct advantage in securing the performance/payment bonds on both sealed bid and negotiated procurements.

I would suggest that the waiver capability of FAR 28.101-1© is rarely utilized and would be interested in knowing where the waiver has been utilized for other than the examples noted in 28.101-1© to your knowledge.

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Guest Vern Edwards
Vern - Sensible or not I think you are overlooking FAR subpart 28.101-1(a) and its last sentence.

I haven't overlooked anything. I only said that it doesn't make sense to me in a negotiated procurement. I didn't say I wouldn't follow the rules.

I am surprised, however, in light of your point about the last sentence of 28.101-1(a), that you said you would require a bid bond only when the government reserved the right to award without discussions. In light of 28.101-1(a), why not for all negotiated procurements?

As for waiver, I don't know whether it's rare or not. Does anyone?

This is no big deal. I'm not saying that you're wrong about anything. I'm just saying what I think.

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...As for waiver, I don't know whether it's rare or not. Does anyone?

I know that at least one of our Corps Districts (and possibly some more) routinely uses the process at 28.101-1(c ) to waive the requirement for a bid bond in negotiated construction acquisitions. Many folks that I talk to don't know that the bid bond doesn't prevent an offeror from withdrawing their proposal at any time prior to award. Many others aren't aware of the the bid bond process, its cost or lack thereof or what value it does provide on negotiated acquisitions, if any.

I think there may be at least some value in obtaining these for competitively negotiated construction solicitations because of the assumed pre-screening process involved in issuing bid bonds and the apparent practice of bonding agencies not charging the construction contractors that they deal with on a regular basis for those bid bonds.

I'll admit that the value of a bid bond is greater for IFB's than for RFP's. I don't know if they offer sufficient value on service contract negotiated acquisitions due to being less frequently (rarely?) used. As I said, I tend to think - but have no data to support it - that it is more bother for a bonding company and their agents to issue bid bonds to prospective service contractors than to issue them for construction solicitations. It may be less likely that the bonding company would waive the issuing fee. I may be way off-base. I never inquired of the bonding agencies or sureties for service contract acquisitions because I never dealt with a bid bond on the several source selections for service contracts that I was involved with. Most of my experience was with source selections for construction and Design-Build construction.

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Guest Vern Edwards

For those who may not understand...

In sealed bidding the bids are opened and the apparent low bidder is immediately known. Award must be made to the low, responsive, responsible bidder, but the award will not be made until the CO determines that the bid is responsive and the bidder responsible, which may take a while. Upon bid opening, the apparent low bidder might want to withdraw its bid if it thinks its price is too low compared to other bidders. Also, the government may not know immediately whether the bidder can get the required performance and payment bonds. The bid bond guarantees that the bidder will hold its bid open for acceptance until it expires, usually 60 days after bid opening, and that it will be able to get performance and payment bonds.

In negotiated procurements, the offerors do not know their standing until after award is made, and they may not find out even then. The government can verify the offeror's ability to get performance and payment bonds before making a source selection decision. Once the government has selected an offeror and accepted its offer, the offeror is contractually bound to provide the performance and payment bonds and to perform. If the government has done a good job of evaluation, there should be little if any risk that the offeror will not be able to get the performance and payment bonds.

Many people, including me, cannot see the value of a bid bond in a negotiated procurement, because the procedures in negotiated procurements protect the government from the kind of risk it faces in a sealed bid procurement. A bid bond should not be necessary to protect the government's interests in a negotiated procurement. In a series of articles in The Nash & Cibinic Report, the professors questioned the utility of payment bonds even in sealed bid procurements.

However, Carl is right that FAR 28.101-1(a) requires them when performance and payment bonds are required, unless the requirement is waived.

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Vern ? At the risk of taking this thread beyond its intent the following is offered with regard to your last post and with the idea that my view might just provide some additional insight to those following the thread.

First to the bid bond and the security it offers to the Government. I know it is not your intent as you do mention ?responsibility? with regard to sealed bidding however for those reading your post it could be misconstrued that the Government has less ability to confirm a bidder?s ability to secure bonding in a sealed bid environment as compared to an offeror in a negotiated environment. In reality I would offer that the ability of the Government to do due diligence regarding the bonding as a responsibility matter in either solicitation situation is exactly the same. As Joel noted in his previous posts one could argue that even the bid bond is not an absolute guarantee of bonding ability, however requiring the bid bond clearly decreases the due diligence effort. Such issues as legally insufficient surety bonds being provided, individual sureties, and other guarantee alternatives complicate matters more but in the end a bid guarantee still provides value in my view. Understanding that you are advocating "following the rules?, or in this case regulations, I would offer that the FAR is written with specific intent to assist in the due diligence effort of determining responsibility of an offeror when it comes to bonding matters.

To your reference with regard to Nash & Cibinic discussion of the value of payment bonds I can relate to lokimango?s dilemma of determining best interest of the Government. While the following is not specific to the example being discussed in this thread there is payment bond value with regard to civilian agency contracting. There are more than a few civilian agencies that perform work on private property. Examples are the USACE, USDA-NRCS, Indian Health Service, DOI-BLM, DOI-Bureau of Reclamation, and the list goes on. Specific experience with some of these agencies has shown that absent the payment bond the private landowners have been subject to commercial material and mechanics liens.

As I noted in my earlier post the real cost to bonding acquired by a contractor is the bond premium they are charged. A surety bid bond cost to a contractor is minimal where they are either charged an annual fee (est. $250-$500) for all bid bonds or an individual fee (est. $25-$50) per bid bond written. No bid bond would be provided to a contractor unless they have demonstrated ability to secure surety performance and payment bonds which again circles back to point I have already made?.Asking for the bid bond is sensible and in the best interest of the Government when it comes to the confidence and protections it offers to all parties of the contract.

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There are more than a few civilian agencies that perform work on private property. Examples are the USACE, USDA-NRCS, Indian Health Service, DOI-BLM, DOI-Bureau of Reclamation, and the list goes on. Specific experience with some of these agencies has shown that absent the payment bond the private landowners have been subject to commercial material and mechanics liens.

But are liens for service contract work on privately-owned property very uncommon or not generally possible? At any rate, Vern's point is that a bid bond can be waived on negotiated acquisitions, even though the contractor will have to provide performance and payment bonds.

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Joel - I understand Vern's points completely in that not only can bid guarantee requirements be waived but it makes no sense to obtain them for a negotiated procurement. I just disagree in general on the sensible part and my additional posts are to put forth my thoughts on why, just as Vern has.

To your question I say common but note that state law provides variables with regard to use as well as the sophistication and want of the contractor. There are lots of examples of service work as remember the liens are not only for materials but the efforts of laborers, again dictated by state law.

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Joel - I understand Vern's points completely in that not only can bid guarantee requirements be waived but it makes no sense to obtain them for a negotiated procurement. I just disagree in general on the sensible part and my additional posts are to put forth my thoughts on why, just as Vern has.

To your question I say common but note that state law provides variables with regard to use as well as the sophistication and want of the contractor. There are lots of examples of service work as remember the liens are not only for materials but the efforts of laborers, again dictated by state law.

Thanks for the info, Carl.

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Guest Vern Edwards

Joel:

I spoke today with a prominent attorney from the Huntsville Division of the Corps whom you know -- S.F. He told me that he always recommends waiver of a bid guarantee in negotiated procurements. He said that he sees no value in a bid guarantee in negotiated procurements.

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Guest Vern Edwards
First to the bid bond and the security it offers to the Government. I know it is not your intent as you do mention ?responsibility? with regard to sealed bidding however for those reading your post it could be misconstrued that the Government has less ability to confirm a bidder?s ability to secure bonding in a sealed bid environment as compared to an offeror in a negotiated environment. In reality I would offer that the ability of the Government to do due diligence regarding the bonding as a responsibility matter in either solicitation situation is exactly the same.

I disagree. In sealed bidding the apparently successful bidder learns of its price standing relative to other bidders at bid opening, and there is a window of time during which it might decide to withdraw its bid while the government is determining its responsibility and processing award paperwork. The bid guarantee protects the government. In a negotiated procurement the offerors do not know their price standing relative to other offerors until an award has been made and announced after a determination of the offeror's responsibility. It is not a matter of the government's ability to determine whether or not bids can be obtained, it is a matter of being able to do so before the offeror knows of its standing. I consider that to be a significant difference. It's not called a "bid" guarantee or bond for nothing.

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This thread strayed from the orignial question of requiring Performance and Payment bonds on services other than construction to a long discussion of bid bonds. I am curious like the orginal poster as to the prevalence of service contract bonds. I have never seen any procurment at my agency require them.

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