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ohnoudidnt14

Construction Bond Premium Payment

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FFP construction contract in SC.
Competitive IFB, SDVOSB set-aside.
Question on behalf of the prime contractor.

The government is required to promptly reimburse a contractor the cost of performance and payment bond premiums per FAR 52.232-5(g). Bonding companies generally require prime contractors also obtain bonds from subcontractors for subcontracts over a certain threshold (usually $250k for small-midsize companies).

The prime contractor has several instances of where the subcontractor bond premium was reimbursed by the government along with the prime’s own bond premium AND several instances (from the same agency no less) where the pay application was denied on the basis of the subcontractor’s bond not being a government requirement.

In my opinion, the subcontractor bond (required by the bonding company of the prime contractor) qualifies as “coinsurance” as stated in FAR 52.232-5(g) because without the subcontractor bond, the bond premium rate applied to the prime (for the entire value of the contract) would have been higher.

Is anyone aware of any case history or regulatory references that substantiate or refute my position? Thanks in advance.

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If the prime contractor hasn't paid the premiums for performance or payment bonds (including coinsurance or reinsurance agreements), then the Governmment doesn't have to pay reimbursement. The Government reimburses the prime contractor for its costs -- the Government does not reimburse the prime contractor for costs incurred by subcontractors.

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ji, thanks for the quick response.

I understand what you are saying, but ultimately the contractor/subcontractor agreement identifies that the contractor is going to reimburse the subcontractor for the bond premium just the way the government is to reimburse the contractor...so it is a cost to the prime regardless of who "paid" it.

What if this were a contract mod. Are you saying the cost of the increased subcontractor's bond is an unallowable cost even though it is a requirement of the bonding company and ultimately reducing the cost of the prime contractor's bond premium?

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All I'm saying is that the FAR provision you cited only covers reimbursement of premiums actually paid by the prime contractor to the surety.

Other costs incurred by the prime contractor, including subcontractor costs, will hopefully be covered by the contract's firm-fixed-price.

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ji, thanks for the quick response.

What if this were a contract mod. Are you saying the cost of the increased subcontractor's bond is an unallowable cost even though it is a requirement of the bonding company and ultimately reducing the cost of the prime contractor's bond premium?

As far I know, a subcontract bond has been considered an allowable cost. But, in my experience , after the initial prime contractor bond premium payment, the bonding company usually doesn't bill the firm for modifications until the final contract price is determined, upon completion. I would assume this is also true for subs who purchase bonds.

Our organization only reimbursed the prime separately for its initial bond premium , then liquidated that advanced payment as progress proceeded. We don't require subcontractor bonds so we didn't reimburse such bonds up front.

To illustrate what I mean by liquidating the advance payment for the bond premium,, say that actual progress equals 10% on a progress payment. The government would show total earnings as 10% of the contract amount plus 90% of the prime's bond premium. When progress equal 20%, total earnings equals 20% plus 80% of the bond premium, and so forth until total progress is 100% and the bond premium is zero.

We also liquidated stored materials reimbursement as the materials were incorporated into the work. I didn't include that in the above illustration as it would further complicate the concept.

If the government reimbursed the contractor for premiums for one or more subcontract bonds that we don't even require, that would unnecessarily complicate the liquidation calculations.

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Joel,

The net effect of my answer and your answer is the same = No, subcontractor bond premiums are not reimbursed under FAR 52.232-5( g ).

ohnoudidnt14,

I didn't talk about subcontractor bond premiums as allowable costs in my answer because we're talking about a competitively-awarded FFP contract. Because we're talking about a competitively-awarded FFP contract, your text about allowable costs and so forth is a distraction. You say the subcontractor bond premium "is a cost to the prime regardless of who 'paid' it" -- that may be true, but it is also irrelevant. In a competitively-awarded FFP contract, we make invoice payments based on price, not incurred costs. In a fixed-price construction contract, we make progress payments based on percent complete, not incurred costs. Frankly, my dear, we don't give a $%@# about allowable costs in the context of your original posting.

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Joel,

The net effect of my answer and your answer is the same = No, subcontractor bond premiums are not reimbursed under FAR 52.232-5( g )

Agreed.

ohno, subcontractor bonds are an arrangement between the prime and its sub(s) to reduce risk to the prime and its surety. We would assume that the sub, who the prime can replace, pays the bond premium, not the prime. The prime should pay its subs for progress performance, not reimburse them up front.

As for increased coverage due to mods, The government shouldn't be reimbursing you under paragraph ( g ). The bonding company should be settling up the final premium upon completion of the contract. The contract price may go up or down as the contract progresses. In my experience, they make several routine inquiries during contract performance and upon final contract payment.

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All, thanks for the help on this. I hope you can see my frustration whereas, just like the bond premium, the prime contractor pays this up-front, it seems that it's an "allowable" cost, yet we can't invoice for it (other than progress payments over the life of the contract). Is there really no arguement that this is "coinsurance" since it lowers the prime's premium?

Joel, the liquidation of the bond premium is an interesting methodology, but my experience with most agencies of-late is to pay the bond premium and separate it out completely from the progress calculation. Also, your comment regarding modifications is generally correct, however if the government is on-the-ball and asks for a "consent of surety" associated with the modification, then the contractor is billed right away...but we don't usually seek payment for the additional premium under (g).

Happy sails.

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Ohno, thanks for the info. Why are you paying the sub's bond premiums?

Regarding the progress payments, we also show(ed) the bond premium as a separate line item on the payment estimate. But we showed a reduced amount for that line item in subsequent payments as the job progressed. Otherwise we'd be paying twice because the bond is also included in each contract line item price.

I don't know if other organizations show a separate line on pay estimates or if they back it out from the contract line items or if they simply have a separaté line item for bond premiums. That is okay, too. Having a separate contract line item for bond cost can invite its own problems, e.g., when the line item doesn't match the actual premium. Bonds are intended to be a spread cost but the government has agreed to help the prime reduce its up front costs for the bond.

The same liquidation procedure should be used for stored materials, when such payments are shown separately on the payment estimate. Not all organizations separate stored materials on the pay estimate roll up. We did.

The final pay estimate should not include a separate amount for the bond or for stored materials.

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