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We are currently in negotiations for a FFP sole-source 8(a) construction requirement.  The offeror provided a breakdown of all subcontractor costs, which showed that the prime contractor is "back bonding" their subcontractors, essentially requiring performance bonds of them.  This is not a requirement of the solicitation, nor of Government policy, for subcontractors to be bonded.  Rather the prime will be required to provide payment and performance bonds, which they are, in addition to this "back bonding".  This additional cost to the Government for this is a relatively substantial number. 

I don't believe it's reimbursable under 52.232-5(g), as it's not my opinion that this is either coinsurance or reinsurance.  I do not believe this is an allowable cost and should be removed from the proposal.

Why would we pay for such "back bonds" in addition to the performance bonds?  Is this an allowable cost?

I just can't seem to stomach this...

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It is not uncommon for prime contractors to require bonds of their primary, key trade subcontractors. I saw that often in our negotiated contracts.

 As far as I know, there is nothing to prohibit such practices as long as they are reasonable for the risks involved. However I would question the necessity (reasonableness)  to require performance bonds of ALL subcontractors.

The( 8(a)) “prime” should justify why it is necessary to bond any or all(?) sub’s.

What is the effect of this on the overall contract price in terms of dollars and percentage?

——————————————

EDIT: My first assumption,  when a prime says it will bond ALL subs is that it is simply employing a way to charge additional overhead and profit. I don’t think that it is necessary because if a sub fails to complete a subcontract, the contractor does have some legal recourse for breach of contract. But if the the contractor wants to reduce their risk for delays or additional costs, etc., then the lower risk, combined with a higher cost to the owner, should be considered in the negotiation of profit. All of the various structured profit estimating algorithms consider risk factors. /END_EDIT

————————————-

 Since this is a risk reduction effort on the part of the prime contractor (the 8(A) “subcontractor”) , I would negotiate a lower profit percentage due to the reduction in risk. 

If they argue that there might be expenses in enforcing sub bonds, I’d argue that that is already included in the markup for G&A and allowance for profit in their subcontracts. 

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31.205-4 -- Bonding Costs.

(a) Bonding costs arise when the Government requires assurance against financial loss to itself or others by reason of the act or default of the contractor. They arise also in instances where the contractor requires similar assurance. Included are such bonds as bid, performance, payment, advance payment, infringement, and fidelity bonds.

(b) Costs of bonding required pursuant to the terms of the contract are allowable.

(c) Costs of bonding required by the contractor in the general conduct of its business are allowable to the extent that such bonding is in accordance with sound business practice and the rates and premiums are reasonable under the circumstances.

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10 minutes ago, C Culham said:

31.205-4 -- Bonding Costs.

(a) Bonding costs arise when the Government requires assurance against financial loss to itself or others by reason of the act or default of the contractor. They arise also in instances where the contractor requires similar assurance. Included are such bonds as bid, performance, payment, advance payment, infringement, and fidelity bonds.

(b) Costs of bonding required pursuant to the terms of the contract are allowable.

(c) Costs of bonding required by the contractor in the general conduct of its business are allowable to the extent that such bonding is in accordance with sound business practice and the rates and premiums are reasonable under the circumstances.

lol, thanks.

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42 minutes ago, joel hoffman said:

It is not uncommon for prime contractors to require bonds of at least their primary, key trade subcontractors. I saw that often in our negotiated contracts.

 As far as I know, there is nothing to prohibit such practices as long as they are reasonable for the risks involved. However I would question the need (reasonableness)  to require performance bonds of all subcontractors. The( 8(a)) “prime” should justify why it is necessary to bond any or all(?) sub’s.

What is the overall effect of this on the contract price in terms of percentage?

 Since this is a risk reduction effort on the part of the prime contractor (the 8(A) “subcontractor”) , I would negotiate a lower profit percentage due to the reduction in risk. 

If they argue that there might be expenses in enforcing sub bonds, I’d argue that that is already included in the markup for G&A and allowance for profit in their subcontracts. 

Thanks for the assistance and input, Joel!

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buonomma, why are you concerned with 52.232-5(g)?  That deals with progress payments not pricing a contract.  Further, nothing in that clause implicates the cost principles from FAR Part 31.

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3 hours ago, Retreadfed said:

buonomma, why are you concerned with 52.232-5(g)?  That deals with progress payments not pricing a contract.  Further, nothing in that clause implicates the cost principles from FAR Part 31.

Technically correct.

The paragraph-5(g) simply allows the contractor to request reimbursement for the bond premiums that it had to pay to obtain performance and payment bonds so that it may commence work.  Otherwise, it would have to amortize the premium as it earns progress payments. 

However,  buonamma is correct that the contractor can’t request reimbursement for subcontractor bond costs under paragraph 5(g). Those costs must be liquidated/amortized/recovered/spread over progress payments for the work performed by those applicable subs. 

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6 hours ago, joel hoffman said:

It is not uncommon for prime contractors to require bonds of their primary, key trade subcontractors. I saw that often in our negotiated contracts.

 As far as I know, there is nothing to prohibit such practices as long as they are reasonable for the risks involved. However I would question the necessity (reasonableness)  to require performance bonds of ALL subcontractors.

The( 8(a)) “prime” should justify why it is necessary to bond any or all(?) sub’s.

What is the effect of this on the overall contract price in terms of dollars and percentage?

——————————————

EDIT: My first assumption,  when a prime says it will bond ALL subs is that it is simply employing a way to charge additional overhead and profit. I don’t think that it is necessary because if a sub fails to complete a subcontract, the contractor does have some legal recourse for breach of contract. But if the the contractor wants to reduce their risk for delays or additional costs, etc., then the lower risk, combined with a higher cost to the owner, should be considered in the negotiation of profit. All of the various structured  profit estimating algorithms consider risk factors. /END_EDIT

————————————-

 Since this is a risk reduction effort on the part of the prime contractor (the 8(A) “subcontractor”) , I would negotiate a lower profit percentage due to the reduction in risk. 

If they argue that there might be expenses in enforcing sub bonds, I’d argue that that is already included in the markup for G&A and allowance for profit in their subcontracts. 

The above is an edit of my original post above. 

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18 hours ago, joel hoffman said:

However,  buonamma is correct that the contractor can’t request reimbursement for subcontractor bond costs under paragraph 5(g). Those costs must be liquidated/amortized/recovered/spread over progress payments for the work performed by those applicable subs.

I am not so sure that this statement is correct.  

Following is reference to a GAO decision  that provides a historic view of the wording now used in 52.232-5(g).  In this historic view bonding costs discussed were that of prime and subs.   The GSBCA case also referenced below discusses within its context bond costs for both the prime and subcontractors where it states "bond premiums included in appellant's initial and revised proposals were estimates of bond premiums to be incurred by appellant and its subcontractors".

Noting these decisions and reading the language of 52.232-5 closely I see nothing that would disallow the payment of subcontractor bonding costs if in submitting its request for payment the prime demonstrates that subs have in fact provided bonding and invoiced the prime for same. 

https://www.gao.gov/assets/420/410197.pdf

https://www.gsbca.gsa.gov/appeals/w1668929.txt    

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I disagree with your conclusion, Carl. 

The 1977 GAO Decision was an opinion as to whether it was legal to reimburse a contractor for actual price of premiums for bonds that are  “required by law” prior to any progress earnings. 

The GAO stated that it wouldn’t object to such reimbursements that would then be liquidated * as progress payments were earned, if a contract provided for such reimbursements. It would require revising the then applicable ASPR progress payments clause. Note that the ASPR clause was then seven years prior to the 1984 initial FAR clause. 

The 2015 GSBCA Decision concerned an appeal of a KO Decision where the Government unilaterally reduced the contract price for alleged “defective pricing”. The contractor submitted its request for reimbursement for its actual bond premiums, which were less than the amounts included in its proposals for two contracts. 

The Decision did not state that the contractor submitted request for reimbursement of payment of subcontractor bond premiums.

The Board stated that the proposed premium was an estimate and that the parties did not agree  on the proposed amount during negotiations only on the overall contract amount. The estimated costs were not “defective cost or pricing data”.  

The paragraph “g” in the payments clause doesn’t limit the contract amount for bonds, which may also include overhead and profit, absent specific contract language  that would limit the contract amount to the actual bond premiums. It only covers reimbursement separately, up front for paid bond premiums. 

I have seen CLIN schedules that have separate line items for bonds limiting the allowable amount to actual bond premiums or the line item amount, whichever was less.

However, for competitively awarded contracts where there is no cost breakdown provided, that is a false assumption. The contractor can include overhead and profit or cushion in other line items.  I would do that. 

The GAO Decision also used the justification that bonds required by law served a public purpose and provided value and protection to the government, thus could be considered to be harmonius with the law prohibiting progress payments prior to any progress, provided that the contract language allows such reimbursements. 

Subcontract bonds are NOT required by law and, in my opinion, provide NO added value or protection to the government. They are solely in the interest of the contractor who requires them. The contract language DOES NOT authorize reimbursement of subcontractor bond premiums under -5(g). They have to be included in the normal progress payments. 

The 1977 GAO Decision notes that non-government agencies tend to consider bond payments part of “mobilization costs”, which were often included as separate bid items. For our contracts, there has to be a Mobilization Line Item in order to pay those types of costs and the contract describes types of costs that would be covered in such a line item. 

*”LIQUIDATE”:  The amount paid up front for bond premiums, if not included in a separate line item, are “liquidated”, by backing it out as progress proceeds on the contract. Example: if a monthly progress payment indicates that overall progress is 10%, you show 90% of the original bond payment and the other 10% will be reflected in the CLINs comprising the 10% progress. Similarly, 80%/20%, etc. etc., until you get to 100%/0%.

This would be an administrative nightmare if you had to do this for each subcontract bond as progress is made on that work. 

Stored materials are similar. , You blackout/reduce or (liquidate) the cumulative stored materials as they are incorporated into the work as progress. 

at any rate, I never saw subcontractor bonds reimbursed separately from progress and our policy didn’t recognize such reimbursement. 

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On ‎9‎/‎14‎/‎2019 at 4:21 PM, joel hoffman said:

I disagree with your conclusion, Carl

You have not provided any reference to support your disagreement. 

Specifically in the referenced Forum thread below an OP notes that an agency did reimburse for subcontractor premiums.   With regard to the thread also note why a prime was requiring subcontractor bonding...because the bonding company of the prime demanded it.   So while you believe there is no value added to subcontractor bonds industry believes there is.

To the rest of your read of the decisions I provided I believe you are missing a very important part of the 1977 decision, that being that reimbursement for total bond premiums actually incurred by a prime is not considered an advance payment when a contract clause provides for such reimbursement.  

Applying the ideal that reimbursement is not an advance payment should a primes subcontract require a subcontractor to provide bonds and the primes subcontract provides that subcontractor bonds will be reimbursed the same ideal applies, reimbursement for all bond premiums is not an advance payment.  I would add here that FAR 31.205-4 provides that bonding costs by subs is considered in the same context as bond premiums for primes when such bonding is sound business practice (required by a primes bonding company!).     A prime if billed by the sub for its bond premium could in turn request the Government for reimbursement such costs as an actual cost incurred in performance of the work just as the 1977 decision depicts.  Yes I would agree that your thoughts on prorating could also occur but the government has no privity of contract with the sub to demand they price a certain way it is a contractual matter between the prime and sub.  Again I note that the exact wording of 52.232-5(g) provides for reimbursement of bond premiums paid by the contractor and the contractor, if they have paid the premium in full for bond premiums to its subs, and as by certification in paragraph (c) of 52.232-5 has so certified, the prime contractor has incurred a cost that they can bill in full for.

Turning next to the GSBCA case you  overlook the point that the decision is with regard to bond premiums incurred by appellant and its subcontractors and specifically deals with paragraph (g) of the 52.232.-5 that such costs, again the incurred costs of bonds for the prime and its subcontractors, were billed for prior to the first contract progress payment and conclusion of the GSBCA was that the billing should have been paid without adjustment.

As always I am open to changing my mind when a substantive reference is provided that says only the primes own bonding costs can be reimbursed.

POSTSCRIPT - I find your argument interesting specific to this thread because factually the OP has provided that the contract in question is an 8(a) and therefore pursuant to the FAR  SBA is the prime and the 8(a) firm is a subcontractor so in applying your position to the instant contract the subcontractor (the 8(a) firm)  could not be reimbursed for the bond premiums.   But by history they are and the reason why is because paragraph (g) of 52.232-5 allows it!!!!!!!

Carl out!

 

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32 minutes ago, C Culham said:

You have not provided any reference to support your disagreement. 

Specifically in the referenced Forum thread below an OP notes that an agency did reimburse for subcontractor premiums.   With regard to the thread also note why a prime was requiring subcontractor bonding...because the bonding company of the prime demanded it.   So while you believe there is no value added to subcontractor bonds industry believes there is.

To the rest of your read of the decisions I provided I believe you are missing a very important part of the 1977 decision, that being that reimbursement for total bond premiums actually incurred by a prime is not considered an advance payment when a contract clause provides for such reimbursement.  

Applying the ideal that reimbursement is not an advance payment should a primes subcontract require a subcontractor to provide bonds and the primes subcontract provides that subcontractor bonds will be reimbursed the same ideal applies, reimbursement for all bond premiums is not an advance payment.  I would add here that FAR 31.205-4 provides that bonding costs by subs is considered in the same context as bond premiums for primes when such bonding is sound business practice (required by a primes bonding company!).     A prime if billed by the sub for its bond premium could in turn request the Government for reimbursement such costs as an actual cost incurred in performance of the work just as the 1977 decision depicts.  Yes I would agree that your thoughts on prorating could also occur but the government has no privity of contract with the sub to demand they price a certain way it is a contractual matter between the prime and sub.  Again I note that the exact wording of 52.232-5(g) provides for reimbursement of bond premiums paid by the contractor and the contractor, if they have paid the premium in full for bond premiums to its subs, and as by certification in paragraph (c) of 52.232-5 has so certified, the prime contractor has incurred a cost that they can bill in full for.

Turning next to the GSBCA case you  overlook the point that the decision is with regard to bond premiums incurred by appellant and its subcontractors and specifically deals with paragraph (g) of the 52.232.-5 that such costs, again the incurred costs of bonds for the prime and its subcontractors, were billed for prior to the first contract progress payment and conclusion of the GSBCA was that the billing should have been paid without adjustment.

As always I am open to changing my mind when a substantive reference is provided that says only the primes own bonding costs can be reimbursed.

POSTSCRIPT - I find your argument interesting specific to this thread because factually the OP has provided that the contract in question is an 8(a) and therefore pursuant to the FAR  SBA is the prime and the 8(a) firm is a subcontractor so in applying your position to the instant contract the subcontractor (the 8(a) firm)  could not be reimbursed for the bond premiums.   But by history they are and the reason why is because paragraph (g) of 52.232-5 allows it!!!!!!!

Carl out!

Why should the Government be responsible for paying this premium all because their bonding agency demanded it?  This is not standard practice nor should it become one.  Maybe in certain circumstances in would be advantageous for one/some subcontractors to be bonded, but certainly not in my specific situation.  Just because it may be the surety's policy to require bonds of the subs does not make it a "sound business practice".  It provides no additional advantages or assurances for the Government, rather only to the surety and maybe the Contractor, so why should we be responsible for reimbursing them (with markups on top, at that) for something we do not require?

Regarding the SBA as the prime contractor, this is not the case, and I cannot remember the last time it was.  The Government negotiates and issues awards directly with the 8(a) Contractor.

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buonomma,

You are at the negotiating table -- if you come to agreement on the bottom-line firm-fixed price (one way or the other), that's good.  If you don't come to agreement, then end the negotiations and ask the SBA for another source with whom to commence new negotiations.

But your focus should be on the bottom-line price, not the individual cost elements.  See FAR 15.405(a).

Edited by ji20874
Worry about the bottom-line price -- don't get hung up on cost elements.

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9 minutes ago, buonomma said:

 

Why should the Government be responsible for paying this premium all because their bonding agency demanded it?  This is not standard practice nor should it become one.  Maybe in certain circumstances in would be advantageous for one/some subcontractors to be bonded, but certainly not in my specific situation.  Just because it may be the surety's policy to require bonds of the subs does not make it a "sound business practice".  It provides no additional advantages or assurances for the Government, rather only to the surety and maybe the Contractor, so why should we be responsible for reimbursing them (with markups on top, at that) for something we do not require?

Regarding the SBA as the prime contractor, this is not the case, and I cannot remember the last time it was.  The Government negotiates and issues awards directly with the 8(a) Contractor.

Argue as you may because primes do require bonding by subs and you can pay the premium  that is why.    I believe market research especially utilizing the internet will provide adequate substantiation that requiring  bonding by subcontractors is industry practice.   You will find that many firms have a policy that for subcontract work over a stipulated dollar amount bonding is needed.   As I also pointed out it may very well be the requirement of a bonding company that a prime secure bonding of subs before the bonding company will provide the prime with bonds.  Likewise I refer back to my post of FAR 31.205-4 and the GSBCA decision that provides further substantiation that bonding by subs is allowable and done. 

I would add the reminder of FAR part 31 allowably of a cost is determined by the following which must be considered in whole -  A cost is allowable only when the cost complies with all of the following requirements: (1) Reasonableness. (2) Allocability. (3) Standards promulgated by the CAS Board, if applicable; otherwise, generally accepted accounting principles and practices appropriate to the circumstances. (4) Terms of the contract.  As ji points out if you think it does not meet this standard then move on but your argument so far has not addressed the standards to reject the costs for subcontractor bonding you are encountering as unallowable you just don't like the idea of it. 

Regarding SBA, have you read FAR subpart 19.8 in detail?    If not I suggest you do.   Most agencies now use a tripartite contract format for 8(a) awards so my quick reference for you to refer to is 52.219-17 which states in the very beginning - "By execution of a contract, the Small Business Administration (SBA) agrees to the following:   (1) To furnish the supplies or services set forth in the contract according to the specifications and the terms and conditions by subcontracting with the Offeror who has been determined an eligible concern pursuant to the provisions of section 8(a) of the Small Business Act, as amended (15 U.S.C. 637(a))."

 

 

 

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44 minutes ago, buonomma said:

It provides no additional advantages or assurances for the Government, rather only to the surety and maybe the Contractor, so why should we be responsible for reimbursing them (with markups on top, at that) for something we do not require?

Take a read here.   I agree it is not spot on but in this case it seems the CBCA thought markup by a prime on subs bonding costs was appropriate.

https://www.cbca.gov/files/decisions/2011/SHERIDAN_11-16-11_1539__RELIABLE_CONTRACTING_GROUP_LLC_508.pdf

 

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2 hours ago, ji20874 said:

But your focus should be on the bottom-line price, not the individual cost elements.  See FAR 15.405(a).

To add.....as this is an 8(a) the standard on bottom-line price is "fair market price" so one should also consider FAR 19.001, 19.806 and 19.807

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The 1977 GSA Decision said that it isn’t an advance payment - if the contract payments clause provides for it. 

On 9/16/2019 at 8:13 AM, C Culham said:

To the rest of your read of the decisions I provided I believe you are missing a very important part of the 1977 decision, that being that reimbursement for total bond premiums actually incurred by a prime is not considered an advance payment when a contract clause provides for such reimbursement.  

I’m saying again that the GAO Decision said that in order to make advance payment for the contractor’s bond that is required by law,  the then versions of ASPR and FPR payments clauses had to be updated to allow it. The wording in the current clause doesn’t state that reimbursement to contractor’s reimbursements to subs for their bonds (not required by law) were included. 

From the 1977 GSA Decision (B-189402):

“Digest: Reimbursements to Government contractors of the total amount of paid performance and payment bond premiums in the first progress payment can be authorized by amending the relevant ,ASPR and FPR clauses to specifically so provide. Such reimbursements are not payments for future performance but are reimbursements to the contractor for his costs in providing a surety satisfactory to the Government as required by law, and therefore. are not prohibited by 31 U.S.C. I 529. Prior Comptroller General decisions clarified.”

Subcontractor bonds are not required by law. The Miller Act requires the contractor to provide performance and payment Bonds for the government. It does not require the contractor to provide bonds from a contractor’s sub’s. Those bonds don’t provide any protection to the government. The contractor is responsible to perform the contract and IT’S payment bond covers payments to subs, suppliers and to the total labor force. The secondary bonds attempt to pass risks for certain subs from the contractor and it’s Surety through other bonds to the subs and their sureties.

The contract payments 52.232-5 clause at (g) doesn’t provide for reimbursement of a contractor payment to subcontractors for bond premiums paid by subcontractors.  

And they aren’t coinsurance or reinsurance. Those are forms of insurance. Bonds are NOT insurance. A contractor must indemnify the surety for any costs incurred under the bonds for performance or payments . 

The GSBCA case did NOT say that the government paid the prime contractor for subcontractor bonds in a progress payment. The case concerned the amount of bond premiums. When the prime invoiced for payment, the government noticed that the contractor’s actual premium was less than the contractor proposed. It was a defective pricing issue. It involved claims on two contracts. 

And - the prior WIFCON thread that you referred to didn’t say that it’s ok to make a progress payment to the contractor for bond premiums paid by subs to the bonding company. 

Im not arguing that a contractor requiring  subcontractor bond is unallowable cost. I’m only discussing separate reimbursement to the contractor in advance of earned progress. 

Carl, you are taking words in your references out of context to justify your position. And your reference to the 8(A) firm as a subcontractor is another out of context grasp. 

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Regarding the bolded wording below from the Digest of the 1977 GAO Decision:

Reimbursements to Government contractors of the total amount of paid performance and payment bond premiums in the first progress payment can be authorized by amending the relevant ,ASPR and FPR clauses to specifically so provide.”

One must understand the context of “total amount” of paid performance and payment bond premiums. At the time, the applicable ASPR Payments clause (I haven’t seen the FPR clause) did not have a provision for reimbursement of bond premiums separately from construction progress. The GAO had earlier reservations that to do so would violate statutes that prohibited advanced payments. So, the contractor had to amortize “the total amount of the paid premiums” over the course of construction as progress accrued.

This was a relook of the earlier decisions. 

The digest that I quoted above clearly described reimbursements of payments  for bonds that are required by law (the Miller Act). It went on to say that such payments would not violate the provisions of 31 USC 1529. To authorize the “total” vs. liquidated  payment, the government would need to amend the relevant Armed Services Procurement Regulations and Federal Procurement Regulations clauses. 

The clauses were updated and the later FAR clause used similar language. 

P.S., this is a FFP Construction Progress Payments issue. For cost reimbursement type construction contracts, I believe that reimbursement to subcontractors for allowable costs, including bond premiums can be and are made, independent of progress on the contract work. Of course, that would depend upon the terms of the subcontract 

For cost reimbursement contracts and CP subcontracts, progress and schedule are evaluated using earned value management systems.

Note that sophisticated construction contractors manage both their FFP and CP contracts using earned value techniques, regardless of whether or not the government requires EVMS.

For FP subcontracts they would normally measure progress for sub payments.

 

 

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6 hours ago, joel hoffman said:

One must understand the context of “total amount” of paid performance and payment bond premiums.

Joel ,

Exactly.  

The matter was brought to the Comp Gen by the then National Research Council, Building Research Advisory Board, Standing Committee on Procurement Policy (BRAB Committee) which was made of up Federal entities involved in construction based on a conclusion and recommendation of the BRAB that reimbursement for premiums paid would be a cost savings to the Government by contractors reducing bid amounts due as it would relieve them of the cost of money (my term) for having to pro rata the premium costs over a contract period.  The BRAB Committee recommendation was supported by the National Association of Surety Bond Producers and the Associated General Contractors of America who by statement provided that "'The general contractor, moreover, has an additional expense in the bids he receives from his subcontractors unless he pays them the full bond premiums for their subcontractor bonds running in his favor as the cost of their expense for borrowing to pay bond premium will be included in their bids to him and passed on by him in his bid to the owner." 

It is this context on which wording for clauses regarding reimbursement of bond premiums became drafted and now resides in the current FAR.   It is also in this context that the decision you want to argue matters less than the current clause that is placed in contracts which does not, let me repeat does not, provide wording that limits payment of premium amounts to that of the prime but rather by its wording allows for reimbursement   "for the amount of premiums paid for performance and payment bonds (including coinsurance and reinsurance agreements, when applicable) after the Contractor has furnished evidence of full payment to the surety." 

Of note the preceding quote read carefully provides a contractor can be reimbursed for coinsurance and reinsurance agreements.  So in your argument a contractor can not be reimbursed for bond premiums (adequately supported and proven) but can be reimbursed for a reinsurance agreement.  Subcontractor bonds transfer risk from the prime to the sub, reinsurance agreements do the same.

All said we disagree.  I put my conclusion specifically on the current clause and the facts that I have found to date that bond premiums of subcontractors are allowable (FAR 31.205-4) and as they are allowable can be reimbursed through invoice to the prime who in turn invoices the Government and the Government reimburses per the clause.  Here I note noting in the FAR limits the allowable cost of a subcontractor bond to a pro rata payment methodology.    These conclusions are based on my limited ability of research  where I have reviewed BCA cases and other documents and can find no definitive answer, and noting that Federal entities do reimburse for  bond premiums inclusive of those premiums of a sub in the manner I have noted in this paragraph that doing so is appropriate.

I therefore hereby agree to disagree until such time you can provide a definitive reference that says sub bond premiums, if billed and substantiated to the prime, can not be reimbursed to the prime.

 

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And I therefore hereby agree to disagree until such time you can provide a definitive reference that says sub bond premiums, if billed and substantiated to the prime, can be directly reimbursed to the prime  under paragraph (g) of 52.232-5.

The GAO Decision filed at B189402 dated October 12, 1977 is not such a reference.   The clear description in the Digest is for bonds required by law. 

The Decision said that contractors could be reimbursed in the first progress payment for the total (full) amount of the premium of bonds required by law - IF the ASPR and FPR payment clauses were amended to allow that. This would be in lieu of "bond premiums [being] recoverable (Indirectly) through progress payments only on the basis, and to the extent, of actual contract performance rendered which qualified under the progress payment clause".

Sub Bonds are not required by law.

I found the FAR 1983 version of the Payments Clause at 52.232-5, with the same language at paragraph (e). I had a set of the ASPR but cant locate it in my files. I haven't found a copy that I can download or view of the 1976 to 1978 edition of the ASPR..

Regarding paragraph (g) of the current FAR clause, performance and payment bonds are not coinsurance or reinsurance.

The Contractor must furnish evidence of full payment to the surety for the bonds. Note that "surety" is singular, not plural - not multiple sureties.

The contractor doesn't pay the surety.  It wont be able to provide evidence of its payment to the surety. If the clause intended to provide for reimbursement of prime payment to sub(s) for their bonds, it would also require evidence of the contractor's reimbursement to the sub(s). The government isn't going to "reimburse the Contractor for the amount of premiums paid for performance and payment bonds" if it didn't pay the various sureties for those bonds or didn't reimburse.those sub(s) who did pay for the bonds. 

The clause doesn’t use the word “total”. 

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So, here is what I am understanding--

  1. In the old days, before 1977, the prevailing thought was that bond premiums were not reimbursable up front because of a fear of advance payment, so all bond premiums had to be pro rata reimbursed over the life of the contract.
  2. In 1977, the GSBCA decided in a particular cited case that this contractor could be reimbursed for bond premiums up front, and that such reimbursement was not an advance payment because the bond premium was required by law.
  3. The sole reason for the mention of "required by law" in the decision was to make the argument that the reimbursement was no longer to be seen as an advance payment.
  4. The 1977 case only addressed reimbursement of a prime contractor's bonds, because those were the facts of that case. 
  5. All of the above was before the FAR existed.
  6. FAR 52.252-5(g) allows for reimbursement up front for performance and payment bond premiums.
  7. FAR 52.232-5(g) does not expressly limit its applicability to bond premiums incurred by the prime contractor.  
  8. Joel thinks subcontractor bond premiums may not be reimbursed in a fixed-price construction contract; Carl thinks they may be.

 

 

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1 hour ago, ji20874 said:

So, here is what I am understanding--

  1. In the old days, before 1977, the prevailing thought was that bond premiums were not reimbursable up front because of a fear of advance payment, so all bond premiums had to be pro rata reimbursed over the life of the contract.
  2. In 1977, the GSBCA decided in a particular cited case that this contractor could be reimbursed for bond premiums up front, and that such reimbursement was not an advance payment because the bond premium was required by law.
  3. The sole reason for the mention of "required by law" in the decision was to make the argument that the reimbursement was no longer to be seen as an advance payment.
  4. The 1977 case only addressed reimbursement of a prime contractor's bonds, because those were the facts of that case. 
  5. All of the above was before the FAR existed.
  6. FAR 52.252-5(g) allows for reimbursement up front for performance and payment bond premiums.
  7. FAR 52.232-5(g) does not expressly limit its applicability to bond premiums incurred by the prime contractor.  
  8. Joel thinks subcontractor bond premiums may not be reimbursed in a fixed-price construction contract; Carl thinks they may be.

 

 

ji, your number 2, above, is incorrect.  It was a 2005 GSBCA Decision* and a recent FAR Payments clause would have been in the contract. The Case didn't indicate whether or not subcontractor bond premiums were included in the up-front payment. Advanced payment wasn't an issue and I didn't read that the GSBCA decided "such reimbursement was not an advance payment because the bond premium was required by law"

That case involved appeals on two separate contracts for contracting officer final decisions with regard to unilateral deductive modifications to two contracts with the General Services Administration (GSA).  They were defective pricing issues. The amount of the actual bond premiums for the two contracts were less than the Contractor, PANGEA, Inc., proposed during negotiations.

*GSBCA 16688, 16689 PANGEA, INC., Appellant, v. GENERAL SERVICES ADMINISTRATION, Respondent.  https://www.gsbca.gsa.gov/appeals/w1668929.txt

Carl and I disagree about whether or not FAR 52.232-5(g) limits its applicability to bond premiums incurred by the prime contractor.  Actually, the clause does allow reinsurance or coinsurance agreements, when applicable. However, subcontract bonds are not reinsurance or coinsurance as far as I can determine. They don't offer any share of performance or payment bonding cost or responsibility to the oblige (the government).

I have not been able to find how the FPR and ASPR implemented the action of adding the upfront bond payment authorization. I don't know if there is any record or explanation of the subsequent "amendments" to the ASPR and FPR clauses. The GAO decision merely modified its earlier prohibition of making upfront premium reimbursements for those bonds that are REQUIRED BY LAW.

Edited by joel hoffman

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29 minutes ago, ji20874 said:

So, here is what I am understanding--

Not quite from my point of view....here is how I see it.

  1. In the old days, before 1977, the prevailing thought was that bond premiums were not reimbursable up front because of a fear of advance payment, so all bond premiums had to be pro rata reimbursed over the life of the contract.
  2. In 1977 the BRAB Committee study recommended that bond premiums be reimbursed up front as a cost saving measure in government contract bids.  Their recommendation was based on the BRAB study that found that bond premiums for both primes and subs if paid for on a reimbursable basis would result in the cost savings in bids to the government.
  3. In 1977, the BRAB requested GAO provide guidance on reimbursed  bond premiums up front, as it was feared that such reimbursement might be a advance payment based on previous GAO decisions and interpretation of 31 U.S.C. 529. 
  4. In the 1977 decision GAO is absent the "required by law" wording.  The GAO actually opined in the last paragraph  of the decision "that 31 US.C. 529 does not preclude Government from providing in a contract for full reimbursement of  bond premiums (where otherwise  appropriate) upon presentation of receipted invoices. While not necessarily the only alternative, this could be accomplished by amending the standard progress payment clauses…"

  5. The 1977 case  addressed reimbursement of a prime contractor's and subcontractors bonds, because the facts presented by the BRAB study addressed both prime and sub bond costs and the same was noted in quotes by non-government entities in the case. 
  6. All of the above was before the FAR existed.
  7. The FAR came into existence in 1983.
  8. At existence FAR 31.204-5 provided and still provides that "Bonding costs arise when the Government requires assurance against financial loss to itself or others by reason of the act or default of the contractor. They arise also in instances where the contractor requires similar assurance" and that such costs are allowable inclusive of "costs of bonding required by the contractor in the general conduct of its business are allowable to the extent that such bonding is in accordance with sound business practice and the rates and premiums are reasonable under the circumstances.
  9. At existence FAR 52.252-5 at (e) allowed for reimbursement up front for premiums paid for performance and payment bonds.
  10. FAR 52.232-5(e) and now at (g) does not expressly limit its applicability to bond premiums incurred by the prime contractor.  
  11. Joel thinks subcontractor bond premiums may not be reimbursed in a fixed-price construction contract; Carl thinks they may be.

References other than the GAO decision which has already been provided -

https://www.govinfo.gov/content/pkg/FR-1983-09-19/pdf/FR-1983-09-19.pdf#page=1

https://books.google.com/books?id=-JMrAAAAYAAJ&pg=PA21&lpg=PA21&dq=B-112376&source=bl&ots=_jdt8lGjA6&sig=ACfU3U1mYCpQsMVn6C3Yp9VQiAZu3-ag_g&hl=en&sa=X&ved=2ahUKEwiZ2ZqRidnkAhXB854KHe56BqwQ6AEwAXoECAkQAQ#v=onepage&q=B-112376&f=false

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10 minutes ago, C Culham said:

In the 1977 decision GAO is absent the "required by law" wording. 

The Digest of the GAO Decision puts the opinion in the last paragraph into proper context. The Digest cannot be ignored It must be read as part of the Decision, when read in whole. It does not support the opinion that subcontract bond premiums can be reimbursed up front.

On 9/16/2019 at 3:38 PM, joel hoffman said:

From the 1977 GSA Decision (B-189402):

“Digest: Reimbursements to Government contractors of the total amount of paid performance and payment bond premiums in the first progress payment can be authorized by amending the relevant ,ASPR and FPR clauses to specifically so provide. Such reimbursements are not payments for future performance but are reimbursements to the contractor for his costs in providing a surety satisfactory to the Government as required by law, and therefore. are not prohibited by 31 U.S.C. I 529. Prior Comptroller General decisions clarified.”

 

Edited by joel hoffman

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And the term "total amount of paid performance and payment bond premiums in the first progress payment"  is in contrast with the then required method limiting the contractor recovering such costs as progress occurred. It doesn't state that "total premiums of prime and sub bonds" can be reimbursed in the first progress payment. In many cases, the prime contractor hasn't even bought out or finalized some of its subcontracts at the time that it invoices for reimbursement of the bond premium. Our contractors commonly sent the first progress payment request with invoice and bond premium receipts in within the first billing period after NTP was issued.

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