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Subcontractor Bonds - Allowable?


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Carl , YOU repeatedly demanded specific references, which I provided. Then YOU didn’t have access to those references and repeatedly asked me for specific language, etc. 

I even quoted the actual FPR amendment to the payments clause that resulted from the  recommendations of the committees and GAO. That clause specifically limited the upfront payment to the required bonds. The clause was quoted in the decision even though it was for claims on Air Force contracts. If that doesn’t convince you of what the GSA and DOD/NASA decided on how to implement the GAO recommendations and the committees’ recommendations, then nothing will.

The only mention of subcontractor bonds in the GAO decision was a statement by the general counsel of the National Surety Providers Association of America of how the contractor has to pay the full price for its bonds upfront,  that they aren’t refundable, that it is a sizable investment and that there are additional cost burden involved when subcontractor bonds are provided. Here is the only mention of subcontractor bonds - not by the government committee - by the surety Industry:

“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 premiums will be included in their bids to him, and passed on by him in his bid to the owner.”

I did not see where the committees making or approving the report and recommendations mentioned or included subcontractor bonds.

The GAO specifically stated that payments for Bonds REQUIRED BY LAW would not violate the statute prohibition on upfront payment before earned  progress was made provided that the contract allows it (hence amend the payments clause to allow it).

. I told you that several times to no avail.

YOU made your own interpretation of the GAO decision.

I suggest that you reread the entire 1977  GAO Decision carefully and you will see that the GAO refers to bonds required by law,  which protect the government’s interests as well as the subs, suppliers and labor force. 

If the GAO DID include upfront reimbursement of discretionary bonds for protection of the contractor, it was NOT adopted in the resulting FPR or DoD amendments to the Payments clauses. 

I referenced Nash and  Cibinic’s 2006 edition of “Administration of Government Contracts “ which established that the contract clauses covered REQUIRED bonds, not discretionary bonds for the contractor’s own protection.

Regardless of whether the cited ENGBCA decision involves my former organization, Nash and Cibinic cited it in their 2006 book to back up reasoning and explanation regarding contract interpretation - after the ENGBCA was combined into the ASBCA in 2000.
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Edit: By the way for you naysayers, Richard Solibakke, the Chairman of the Engineer Board of Contract Appeals in the Lane Construction Decision, was the Chairman of the Armed Services Board of Contract Appeals before that. He was a highly respected jurist. 

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The issue in the Bean Dredge decision had nothing to do with subcontractor bonds being included in the lump sum bid item for bonds. The contractor included other costs associated with the Miller Act bonds and so called admin costs in the lump sum bid item. The government tried to use the paragraph (g) language to say that the contractor could only ask for reimbursement of premiums. The decision said that paragraph in the Payments clause was for a different purpose.and nothing in the bid item description defined a limit on what could be included in the lump sum bid item..

Note that the issue being debated here are the methods and entitlement to upfront reimbursement of discretionary bonds in a fixed price construction contract where progress payments are based upon earned progress.

It is not about allowability of costs for discretionary subcontract bonds. That is not in dispute here. 

 I don’t need to prove anything more to you. 

YOU should provide definite references to back up YOUR interpretation that it is legally permissible to reimburse a contractor upfront - prior to any percentage of work accomplished or prior to earned progress - for payment of discretionary bond premiums for bonds that it requires for its own protection - not for the protection of the government. The Miller Act bonds already provide the government,  the laborers, subcontractors and supplier’s  that protection. 

If Don Mansfield agrees with you, then HE ought to be able to provide definite references to legally support such upfront reimbursement in payments based on progress of work performed.. 

EDIT: By the way, I have been involved in construction contracts with many unit priced line items, without any lump sum items and without any separate line item for bonds. The only way to show payment for a unit priced item is to identify the number of those items completed. One can’t substitute bond payment for a quantity of completed unit priced item of work. 

 

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1 hour ago, joel hoffman said:

If Don Mansfield agrees with you, then HE ought to be able to provide definite references to legally support such upfront reimbursement in payments based on progress of work performed..

joel,

I think you've been misinterpreting me. I don't have a position on whether subcontractor bonds are included in FAR 52.232-5(g). My point is that the definition of "bond" at FAR 28.001 is not relevant to making that determination. ALAL suggested that it was and that's why I threw the flag for misapplication of FAR definitions.

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On 10/3/2019 at 1:16 PM, Don Mansfield said:

joel,

I think you've been misinterpreting me. I don't have a position on whether subcontractor bonds are included in FAR 52.232-5(g). My point is that the definition of "bond" at FAR 28.001 is not relevant to making that determination. ALAL suggested that it was and that's why I threw the flag for misapplication of FAR definitions.

Ok.

Don,  do you agree or disagree or have no opinion that  -

1.Since at least 1984, the Miller Act requires a performance bond (Standard Form 25) and a payment bond (Standard Form 25-A) be furnished for construction contracts exceeding certain dollar thresholds, except under certain exceptions. This is stated at 28.102-1 and 28.106-1.The bond forms are prescribed in 28.106-1. 

2. Prior to the requirement for the clause at 52.228-15, FAR 28.102-3 stated that, when Performance or payment bonds are required, the solicitation qcell shall specify (a) The requirements for the bonds;

(b) The Penal sum of each bond...; and

(c) The deadline for submitting acceptable bonds.

3. Sometime between the dates of Jan 1996 and July 26, 2000 (FAC 97-19) the FAR at 28.102-3 was revised to add the clause at 52.228-15 Performance and Payment Bonds - Construction. This clause specifies the amount required  and bond forms to be used. 

4. The bond forms identify the Principal, the Surety(ies), penal sum , and the obligation to the government (the “obligee').

5. Unless there is another requirement in the Solicitation for different bonds or alternative means of protection , the above references essentially describe the requirements for performance and payment bonds in construction contracts. 

Don, are you saying that you cannot read clause 52.232-5, including paragraph (g), in harmony with clause 52.228-15? 

In other words, are you saying that you do not agree that it, as a contract requirement itself,  merely provides methods and procedures for the payment of progress payments, and in conjunction therewith, payment on a lump sum basis for performance and payment bond premiums where there is an otherwise underlying contractual obligation to pay such costs?

If so, would you please provide the basis for your opinion? 

Thanks. 

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51 minutes ago, ji20874 said:

Joel,

I think the more appropriate question is whether you agree or disagree with the convention at FAR 1.108(a)?  Choose one.  

Here's a link:  https://www.law.cornell.edu/cfr/text/48/1.108

 

Apparently Nash and Cibinic and several contract appeals decisions didn’t limit the extent and intent of contract interpretation to the literal convention at 1.108(a). 

And the GAO itself said that the recommended upfront reimbursement is for bonds required by law.

Discretionary bonds that are for the sole protection of the contractor and its surety are not required by law or by the contract unless some rube decides to add such a requirement.

Discretionary bond costs are not necessarily unallowable in the contract price per FAR 31.2.

They just are not allowed to be paid up front in a fixed price construction contract. 

One must understand the distinction between required bond and discretionary bonds and the legal basis that GAO used to rationalize how the government could make up front reimbursements for bonds that are required by law. 

The GAO said it would be necessary to modify the payments clause to allow upfront reimbursements for the performance and payment bonds.  

You want a yes or no answer that is akin to asking me : “Yes or no - Are you still beating your wife?”

 

 

 

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It is a very simple question, and it really is a YES or NO question.  I'll take your very long answer as a NO.  

I think you err in lumping that question with the "Are you still beating your wife?" construct, and that you err further in thinking that affirming the answer as YES will weaken your argument (which I understand to be that subcontractor bonds not required by the prime contract are not reached by para. (g) of FAR 52.232-5).  A YES answer could be entirely consistent with your argument.  Rather, it seems that your insistence on NO actually weakens your argument.  

 

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6 hours ago, ji20874 said:

It is a very simple question, and it really is a YES or NO question.  I'll take your very long answer as a NO.  

I think you err in lumping that question with the "Are you still beating your wife?" construct, and that you err further in thinking that affirming the answer as YES will weaken your argument (which I understand to be that subcontractor bonds not required by the prime contract are not reached by para. (g) of FAR 52.232-5).  A YES answer could be entirely consistent with your argument.  Rather, it seems that your insistence on NO actually weakens your argument.  

 

ji, is it legal on a firm fixed price construction contract to reimburse a contractor upfront for discretionary performance and payment bonds that aren’t a contract requirement,  that it requires for its own protection ? 

If the answer is yes, why can it do that and what legally authorizes it? 

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Actually, I agree with the statement at FAR 1.108(a) that [as applied to the term performance and payment bonds in FAR 52.232-5] retains its common dictionary meaning -  except that it is only applicable to bonds that are required to be furnished by the contract. One must interpret contract terms in harmony with each other.

A simple “yes” leads to arguments that ANY type of performance or payment bonds can and must be reimbursed upfront upon demand, when the term is read by itself, outside the context of the contract REQUIREMENTS.

I feel that the yes or no question asked hereinbefore was baited.

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39 minutes ago, joel hoffman said:

If the answer is yes, why can it do that and what legally authorizes it? 

The contract!

 

39 minutes ago, joel hoffman said:

A simple “yes” leads to arguments that ANY type of performance or payment bonds can and must be reimbursed upfront upon demand, when the term is read by itself, outside the context of the contract REQUIREMENTS. 

Not true.  "Must" depends on the contract terms.  And as such your statement  that   "the contractor can’t request reimbursement for subcontractor bond costs under paragraph 5(g)."  is also not true unless the contract so says.  You did not and do not know what the contract says.   GSBCA with regard to bond costs that included both prime and subcontractor bond costs has unequivocally stated that "In the absence of  a bidding schedule for a fixed-price contract that contains specific language requiring bidders to include actual bond costs in their bids,  [Foot # 3 ] the Payments clause included in appellant's fixed-price contracts does not limit the contractor's right to receive the entire contract price, even if its actual bond premiums incurred after contract award are less than those estimated during the bidding process. "  

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Let’s not confuse the allowability of costs in a fixed price contract with when or how they are payable. Unless the contract limits the amount of money the contractor can include in the contract price, the contractor can receive the contract price (allowability issue). Yep.

Contract clauses and terms must comply with the law. Before the original amendments to the payment clauses for fixed price construction contracts, no upfront bond costs were legally allowable as per per several GAO decisions.

In 1977, the GAO clarified that the clauses could be modified to allow upfront payments of premiums for bonds and made it clear in that Decision that it was because the payments would be for bonds that were required in the contract (by law). The clauses were modified to require upfront payments of required bonds in 1979.

This thread is essentially a circular debate with no end. We are all in an echo chamber. 🤪

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1 hour ago, joel hoffman said:

Contract clauses and terms must comply with the law.

What law prevents a contractor from being able to place the cost of subcontractor bonds in firm fixed construction contract pricing?   None!

What law prevents a contractor from being able to seek payment for such bonds when submitting a request for invoice payment on a firm fixed construction contract?  None.

What law prevents the government from reimbursing the contractor for such bonds in the first payment under a firm fixed construction contract?  None. 

Circular only because you want to imply that such laws do exist.   Such laws do not exist and therefore it is not an argument about laws it is an argument about the plain language of a contract clause.  The contract clause does not define bond therefore any bond for which the contractor can provide full evidence of payment to the surety. 

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I wrote how I might treat subcontractor bonds under para. (g) of FAR 52.232-5 earlier in this thread.

If a contracting officer agrees to include subcontractor bonds under para. (g) of FAR 52.232-5, life goes on and everyone is happy.

If a contracting officer does not so agree, the contractor will still be paid the full contract price eventually (assuming successful performance).  If the contractor really wants those costs included in the first progress payment under para. (g), it can make that demand as a claim under the Disputes clause.  Indeed, if a contracting officer refuses any payment request for any reason, the contractor may always assert the contract's Disputes clause for resolution.

Thus, it isn't necessary that everyone agree.  

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1 hour ago, C Culham said:

What law prevents a contractor from being able to place the cost of subcontractor bonds in firm fixed construction contract pricing?   None!

I still agree. 

1 hour ago, C Culham said:

What law prevents a contractor from being able to seek payment for such bonds when submitting a request for invoice payment on a firm fixed construction contract?  

No “law” prevents it from “seeking payment” for such bonds when submitting a request for invoice payment on a firm fixed construction contract.

1 hour ago, C Culham said:

What law prevents the government from reimbursing the contractor for such bonds in the first payment under a firm fixed construction contract?  None. 

Unless the law has changed, according to the GAO:

”31 U.S.C. §  529 (1970), which provides, in pertinent part, as follows:
"No advance of public money shall be made in any,case unless authorized by the appropriation concerned or other,'law. And in' all cases of contracts for the performance of any service, or the delivery of articles of any description, for the use of the'United States, payment shall not exceed the value of the service rendered, or of the articles delivered previously to such payment.”

“Reimbursement' to Government contractors of the total armouint of paid performance and payment bond premiums in the first progress payment
can be authorieid 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, end therefore. are not prohibited by 31 U.S.C.  § 529. Prior Comptroller General decision clarified. “

The payment clauses were subsequently amended to allow reimbursement of premiums for Miller Act required performance and payment bonds. Actually the first version required upfront payment for those bonds and did not allow pro-rated payment for those bonds through progress earnings.

Please note that most of the Boards of  Contract Appeals cases that concerned separate bid items for bonds were the result of either the contractor or government being unhappy with the results due to the way the line items  were written, producing results unexpected by one party or the other.  I mentioned earlier that the separate bid items were a pain in the butt. 

If a KO is bound and determined to pay for discretionary bonds upfront, the contract should clearly state that. However, since such bonds aren’t required nor do they protect the government or other subcontractors, it serves little if any public interest and flirts with the GAO’s reasoning why that would be prohibited by the above law.

indeed, the ASPR and FPR were NOT amended to allow upfront reimbursement for such discretionary bonds. Thus they would be paid for on a pro-rated basis as part of earned progress under paragraph (b).

The clause was revised to eliminate the restriction to upfront only reimbursements for the Miller Act bonds. According to several subsequent Decisions, the (g) clause is interpreted to apply to whatever performance and payments bonds are required by the contract. 

 

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37 minutes ago, ji20874 said:

I wrote how I might treat subcontractor bonds under para. (g) of FAR 52.232-5 earlier in this thread.

If a contracting officer agrees to include subcontractor bonds under para. (g) of FAR 52.232-5, life goes on and everyone is happy.

If a contracting officer does not so agree, the contractor will still be paid the full contract price eventually (assuming successful performance).  If the contractor really wants those costs included in the first progress payment under para. (g), it can make that demand as a claim under the Disputes clause.  Indeed, if a contracting officer refuses any payment request for any reason, the contractor may always assert the contract's Disputes clause for resolution.

Thus, it isn't necessary that everyone agree.  

I would add that, If a contracting officer agrees to include subcontractor bonds under para. (g) of FAR 52.232-5, then the contract should state that. Life goes on and everyone is happy (or “fat, happy and dumb” 😋).

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One could add such text to contracts in his or her contracting officer practice.  But not having such text need not bar a contracting officer and contractor from coming to agreement post-award.  Often, I suppose, this question will first arise during post-award administration.

When I wrote “everyone is happy,” I meant happy in a professional sense.  To re-characterize that as “fat, happy, and dumb” goes beyond my intent, and I regret your re-characterization, even if laughed off with an emoticon.  Perhaps, Joel, someone could make a considered and professional decision that differs from what you would do without being “fat, happy, and dumb”? 

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By the way, with respect to the questions in the original post,  if you are negotiating a sole source construction contract and the prospective contractor includes costs for subcontract bonds, in particular for ALL subs and/or suppliers, that isn’t standard industry practice, per my conversation with a friend who is a long time Surety Bonding Agency co-owner.

I suggest that you have the prospective contractor identify the bonding agency and point of contact, then call them to verify what they are requiring and why.  

When the bonding companies and their sureties require subcontract bonds before selling bonds to contractors, they are pre-qualifying the contractor and will use various criteria on how extensive their requirement will be, based on the strength of the contractor, the size of the subcontracts, the type and complexity of the subcontract work, etc. 

In addition, if it is not a sole source acquisition, the nature of competition will require judicious selection of subcontract bond coverage.

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4 hours ago, C Culham said:

I guess the Prompt Payment Act is "dumb" for addressing the matter of sub bonds as they relate to payment to a prime?  

Nope. It discusses retainage from the amount due a sub from the contractor’s progress payment. As you know, the government doesn’t hold retainage on reimbursement for prime contractor bond payments per paragraph (g). 

“52.232-17

...“d) Subcontract clause interpretation. The clauses required by paragraph (c) of this clause shall not be construed to impair the right of the Contractor or a subcontractor at any tier to negotiate, and to include in their subcontract, provisions that --

(1) Retainage permitted. Permit the Contractor or a subcontractor to retain (without cause) a specified percentage of each progress payment otherwise due to a subcontractor for satisfactory performance under the subcontract without incurring any obligation to pay a late payment interest penalty, in accordance with terms and conditions agreed to by the parties to the subcontract, giving such recognition as the parties deem appropriate to the ability of a subcontractor to furnish a performance bond and a payment bond;”

Im not 100% certain what it means. However it appears to mean that the contractor should take into account a subcontractor performance and/or payment bonds, if any,  befote deciding whether or not to withhold** retainsge from the subs Share of a progress payment. If a sub is bondable and furnishes a bond, then there is less need to withhold retainage to protect the (primes) interests. 

You are likely  aware that the government isn’t supposed to  withhold retainage from reimbursement for the prime’s performance and payment bonds (52.232-5 (g)).

**Per the PPA Amendments of 1988, the Government actually physically holds the retainage from the progress payments. The contractor notifies the government of its intent to retain some if the sub’s payment.

There is no government requirement for a prime to pay for or to reimburse a sub upfront for a subcontract bond. 

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On ‎10‎/‎4‎/‎2019 at 1:05 PM, joel hoffman said:

Nope. It discusses retainage from the amount due a sub from the contractor’s progress payment. As you know, the government doesn’t hold retainage on reimbursement for prime contractor bond payments per paragraph (g). 

Exactly (discusses sub to sub as well).

On ‎10‎/‎4‎/‎2019 at 1:05 PM, joel hoffman said:

“52.232-17

Actually 52.232-27

 

On ‎10‎/‎4‎/‎2019 at 1:05 PM, joel hoffman said:

Im not 100% certain what it means. However it appears to mean that the contractor should take into account a subcontractor performance and/or payment bonds, if any,  befote deciding whether or not to withhold** retainsge from the subs Share of a progress payment. If a sub is bondable and furnishes a bond, then there is less need to withhold retainage to protect the (primes) interests. 

Actually I believe the read is this because your thinking assumes privity of contract issues.  The following does not...

Subcontractor submits an invoice to the prime that includes their subcontracting bonding costs.  Prime sends invoice to government seeking reimbursement of all bonding costs.  Government pays prime, prime pays subcontractor. Government does not retain money from the payment but the prime can, should their contract with the sub so state retain money from the sub.  The sub can further retain from lower tier sub contractors if such contracts so state.

Most of all either my interpretation which no doubt you will have conflict, or yours, supports 100% that a subcontractor may have bonds with the prime as the oblige and the government acknowledges same with regard to payments wherein a prime who gets paid for subcontractor bonds can take a retainage.

Consider further that we are talking FFP contracts, either negotiated or bid, and in the case of the latter the government has no inkling as to how the prime priced the contract.  Further support the government arranges the application of PPA in the prime contract to not interfere with a  prime who decides to put ALL bonding in a certain place and request reimbursement for ALL upfront.

All as well leads to the conclusion that we are talking payment processes and not your concocted rules that a prime must include sub pricing in a certain manner and therefore their request for payment processes in some certain fashion when the solicitation and resulting contract are absolutely silent on the matter of sub bonds.

 

 

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On 10/6/2019 at 9:21 AM, C Culham said:

Subcontractor submits an invoice to the prime that includes their subcontracting bonding costs.  Prime sends invoice to government seeking reimbursement of all bonding costs.  Government pays prime, prime pays subcontractor. Government does not retain money from the payment but the prime can, should their contract with the sub so state retain money from the sub.  The sub can further retain from lower tier sub contractors if such contracts so state.

I’m through arguing with you about your other beliefs but I am going to correct your assertion that the contractor can withhold or retain money from  a government progress payment made to it. 

One of the features of the Prompt Payment Act Amendments of 1988 which industry hated was the prohibition on contractor using retainage or withholding from its subs for financing purposes. The contractor can’t ask for payment of any money that it will retain or withhold from payments to its subcontractor(s).

See paragraph 52.232-27-(h).

“h) Subcontractor payment entitlement. The Contractor may not request payment from the Government of any amount withheld or retained in accordance with paragraph (d) of this clause until such time as the Contractor has determined and certified to the Contracting Officer that the subcontractor is entitled to the payment of such amount.”

In addition, 52.232-5 requires the contractor to certify with each request for progress payments, among other things, the following:

”(c) (2) All payments due to subcontractors and suppliers from previous payments received under the contract have been made, and timely payments will be made from the proceeds of the payment covered by this certification, in accordance with subcontract agreements and the requirements of chapter 39 of Title 31, United States Code;

(3) This request for progress payments does not include any amounts which the prime contractor intends to withhold or retain from a subcontractor or supplier in accordance with the terms and conditions of the subcontract; and...”

It’s been that way since April 1989, Carl.

In 1988, Congress listened to the complaints of the subcontracting community that contractors were using Retainage and withholdings from the subs’ earnings to help finance the project.

The law and the prompt pay clause allow the contractor to retain or withhold in accordance with its subcontract. However, it can’t seek payment for that retainage or withholding until it is ready to pay those amounts to its subs. 

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3 hours ago, joel hoffman said:

I’m through arguing with you about your other beliefs but I need to correct your assertion that the contractor can withhold or retain money from  a government progress’s payment to it. 

Joel thank you for the correction and as you note a prime can request  payment for sub bonding costs, and if so paid must pay the sub the full bonding costs.   The prime and the government can not  "retain" any amount from payment .

Here is my correction to my post -

Subcontractor submits an invoice to the prime for subcontracting bonding costs.  Prime sends contractor  invoice to government seeking reimbursement of all bonding costs including that of the sub.   Government does not retain money from the payment.  Government pays prime, prime pays subcontractor.

 

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On 10/6/2019 at 6:01 PM, C Culham said:

Joel thank you for the correction and as you note a prime can request  payment for sub bonding costs, and if so paid must pay the sub the full bonding costs.   The prime and the government can not  "retain" any amount from Payment. 
 

Carl, please don’t put words in my mouth. 

I did not agree, note or say that the prime can submit an invoice for upfront payment of subcontractor bonds. 
 
I haven’t changed my position that upfront payment is only for contractually required bonds, not for financing discretionary ebonds for the sole protection of the prime or its bonding company.

On 10/6/2019 at 1:57 PM, joel hoffman said:

The contractor can’t ask for payment of any money that it will retain or withhold from payments to subcontractor.

Fact : The contractor can’t ask for payment of any money in a progress payment that it will retain or withhold from payments to subcontractor.

On 10/6/2019 at 1:57 PM, joel hoffman said:

 I need to correct your assertion that the contractor can withhold or retain money from  a government progress payment made to it. 

Fact. That’s the only point I made.

Those who are administering or have administered construction contracts awarded after 31 March 1989, should know this.

 It’s been that way since April 1, 1989. (for 30 1/2 years) !

The PPA Amendments of 1988 preclude the prime contractor from asking for payment of any amounts that will be retained or withheld from payments to subcontractors or suppliers.  That was one of many changes to progress payments for FP construction contracts. 

The Prompt Payment clause and the Payments clause for fixed price construction  were both updated, effective April 1, 1989 for all contracts awarded after March 31, 1989. This was to implement the Prompt Payment Act Amendments of 1988.

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