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Requirement for Additional Bonding for a Construction Modification

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I have an upcoming modification to a construction contract for work within scope, which will increase the contract price by <$150k.  The Payment and Performance Bonds have been required by the contract and provided by the Contractor.  In all previous modifications, the Government has paid the Contractor's bond rate for each increase.

IAW FAR 28.102-2(d), if the contract price increases, the Government must secure any additional bonding needed.

Is there any wiggle room on this?  We only have a certain amount of funding and applying the bond rate to the Contractor's proposal puts us over that amount.  Can we not require additional bonding for any given modification?  Any help would be appreciated.

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Does FAR Part 28 give any guidance on waiving or lowering bonds or the penal amount of bonds?

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I appreciate the quick response!

It sure does.

I am leaning towards the applicable FAR Clause, 52.228-15 -- Performance and Payment Bonds -- Construction, which states:

"The Government may require additional performance and payment bond protection if the contract price is increased. The increase in protection generally will equal 100 percent of the increase in contract price."  Furthermore, "The Government may secure the additional protection by directing the Contractor to increase the penal amount of the existing bond or to obtain an additional bond."

 

 

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That's the wrong place -- that does not talk about reducing. You need to read FAR Part 28, which is instructions to the contracting officer.

Read all of subpart 28.1 and 28.2, but in particular look at 28.102-2(b)(1) and (2), 28.203-5(c), and 28.204(b).

Why do you want to reduce the protection that bonds give the Government? Has the contractor already completed a significant portion of the work? Why not leave well enough alone?

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10 minutes ago, ji20874 said:

That's the wrong place -- that does not talk about reducing. You need to read FAR Part 28, which is instructions to the contracting officer.

Read all of subpart 28.1 and 28.2, but in particular look at 28.102-2(b)(1) and (2), 28.203-5(c), and 28.204(b).

Why do you want to reduce the protection that bonds give the Government? Has the contractor already completed a significant portion of the work? Why not leave well enough alone?

I did not mention anything about "reducing" the amount of the bonds, nor do I wish to do so.  Rather, the intent is to NOT require any ADDITIONAL bonds as a result of increase in the contract price via modification; we do not require an increase in the penal amount/  A significant portion of work (>90%) is in fact completed.

 

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Making a decision not to ask for 100% is, in effect, a reduction or relaxing of the bond requirement.

If the contractor has completed a significant portion of the work, the citations I shared will be helpful to you.

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Wait, what you do or want to do may not be indicative of what the surety industry does.   Remember the surety industry is always asking you for info like performance status, mods done, etc.   It could be that the surety is going to automatically increase the value of the bond when they find out that a modification has been done.

Noting this I suggest that you might want to ask the surety or their authorized  agent what they are going to do when they find out that a modification has been issued against the contract.   You may find out that all your ideas on what to do are for not.

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1 hour ago, C Culham said:

Wait, what you do or want to do may not be indicative of what the surety industry does.   Remember the surety industry is always asking you for info like performance status, mods done, etc.   It could be that the surety is going to automatically increase the value of the bond when they find out that a modification has been done.

Noting this I suggest that you might want to ask the surety or their authorized  agent what they are going to do when they find out that a modification has been issued against the contract.   You may find out that all your ideas on what to do are for not.

That is pretty much what I discovered .  The final bond cost by the surety will generally reflect the modified contract price. The surety is at some risk for bonding the additional work- it doesn’t donate that risk. 

By the way, credit mods should include a credit for a reduction in the bond cost, like increase mods should include additional bond costs. The surety is relieved of some potential risk when work is deleted. 

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I am very familiar and aware of every point made thus far, and am greatly appreciative for everyone's time. 

However, I am trying to be creative here to meet my customer's needs, so was trying to find out if there was anything prohibiting me from doing the following...

My goal is to NOT require the Contractor (therefore the surety) to increase the penal sum of the bond amount and cover the added work.  Given the circumstances of the contract, and the scope of the modification, there is little to no benefit to the Government in requiring payment/performance bonds.  Would this require consent from the surety?

 

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What does the FAR say?

Then, think carefully about why the FAR says what it says.  You might conclude that the apparent FAR insistence on consent of the surety makes good sense.

If you find that reducing the penal amount of the bonds below the value of the contract as modified without the surety’s consent is a deviation from the FAR, well, we at this forum can’t give you permission to deviate from the FAR — but your agency leadership can.

If the concern is going over a limit, well, bond premiums are relatively cheap -- would it work to negotiate the price for the work down a little to cover for the bond premium?

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2 hours ago, buonomma said:

I am very familiar and aware of every point made thus far

Bluntly, are you sure?  I realize my experience of the past may not be equal to the current processes but let me offer an anecdote.    By my recollection some indemnity agreements between the bonding entity and the contractor will only adjust bonds on certain increments, say $150,000 or whatever.   Again it depends on the specifics of the indemnity relationship between the contractor and bonding entity so again I highly recommend that you research your specific instance before you put much effort into your creative idea.

 

2 hours ago, buonomma said:

My goal is to NOT require the Contractor (therefore the surety) to increase the penal sum of the bond amount and cover the added work.  Given the circumstances of the contract, and the scope of the modification, there is little to no benefit to the Government in requiring payment/performance bonds

 While you may think that there is little or no benefit remember the bonding company may.  They in fact have bonded the entire work and their liability is there unless they release the contractor who in turn would release the government.   So I arrive at the same conclusion - either you or your contractor should talk to the surety's representative before you do anything as whatever benefit you think you are gaining for your customer may be for not!

 

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If the contractor or it’s subs don’t pay their labor or suppliers for some or any of the addd work, will the government and the others be covered by the existing payment bond? 

Suggest you ask the bonding company that question. You might not be able to know about any problem before you make the progress payments for the added work. The Miller Act doesn’t just protect the government. Since subs, mechanics and suppliers can’t invoke liens on Federal property, the Miller Act provides for payment bonding the work. 

And, in my experience, the relative inability or unwillingness of most government personnel to proactively and effectively intervene in such circumstances would make the extra bonding not only prudent but necessary. 

What will you do to ensure that the labor, subs and suppliers are paid if you later learn of such claims for non-payment (payment bond applicability)?

What will you do if there is a latent defect in the added work and the prime won’t fix it after acceptance during or after the construction warranty period (performance bond applicability)?

Do you know what to do in such cases? 

The chances may be remote but I’ve seen it happen often over my career.

Please talk to the Bonding agency who issued the bonds. Ask them...

Please let us know what they say.  Thanks. 

 

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P.S. if you don’t or won’t talk to the bonding company, I suggest that you courageously  tell the customer NO, you won’t waive the bond. 

I don’t think that the shortage of funds is proper justification for the MFR waiving the requirement.

Why not negotiate the change price down by the 1.5 or 2 percent to cover the bond? If nothing else, you can tell the contractor your funding limit. If they want the work, I’m betting that they will probably accommodate you.

Because you said it is “an upcoming modification”, I assume that negotiations haven’t begun. Even if they have, they apparently aren’t finalized yet.

I hope that you actually negotiate changes rather than simply accept whatever you are told it will cost.

Recommend changing your “goal” to properly settling the mod  within the available funding. To me,  THAT is “creative”.

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