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joel,

That's not how definitions work. A word or term used in one clause does not necessarily have the same meaning when used in a different clause because the two clauses are in the same contract.

You are ignoring the clear rule in FAR 1.108(a):

Quote

Words and terms. Definitions in part  2 apply to the entire regulation unless specifically defined in another part, subpart, section, provision, or clause. Words or terms defined in a specific part, subpart, section, provision, or clause have that meaning when used in that part, subpart, section, provision, or clause. Undefined words retain their common dictionary meaning.

Thus, the definition of "bond" at FAR 28.001 only applies to FAR part 28. If a contract contains the Definitions clause, then that definition extends to clauses prescribed in FAR part 28. FAR 52.232-5 is not prescribed in FAR part 28, so there's no basis for your assertion that the definition of "bond" at FAR 28.001 applies to FAR 52.232-5.

I think this thread is a good example of what can go wrong when we lack intellectual humility

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If you think that the clause at 52.232-5 isn’t referring to the performance and payment bonds required by the contract at 52.228.15, then this thread is an example of what can go wrong when we lack common sense! 

That clause refers to progress and final payments for all of the contract performance requirements. 

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8 minutes ago, joel hoffman said:

If you think that the clause at 52.232-5 isn’t referring to the performance and payment bonds required by the contract at 52.228.15, then this thread is an example of what can go wrong when we lack common sense! 

That clause refers to progress and final payments for all of the contract performance requirements. 

That does not make the definition at FAR 28.001 applicable to FAR 52.232-5. Try again.

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On 9/26/2019 at 11:03 AM, joel hoffman said:

As for Don’s statement that the definition of performance bonds in Part 28 are not applicable to the bonds referred to in 52.232-5(g). , that is wrong. Clause 52.228-15,  Performance and Payment Bonds - Construction defines the contract requirements for performance and payment bonds. One must read the contract as a whole.

The clause at 52.232-5(g) is referring to the Payment Bond (Standard Form 25A) and Performance Bond (Standard Form 25) specifically required for the construction contract by contract clause 52.228-15   “Performance and Payment Bonds—Construction”. Co-insurance or reinsurance also pertain to those bonds when applicable.

-Nothing more and nothing less - unless the government requires additional, separate bonds in the solicitation and contract. 

52.232-5(g)

“(g) Reimbursement for bond premiums. In making these progress payments, the Government shall, upon request, reimburse the Contractor 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. The retainage provisions in paragraph (e) above shall not apply to that portion of progress payments attributable to bond premiums.”

52.232-5 is consistent with in harmonious with 52.228-15. 

The government is the obligee. 

Here is the performance bond form: https://www.gsa.gov/cdnstatic/SF25-16c.pdf?forceDownload=1

Note that the bond premium is listed on the performance bond. There is no separate premium for the payment bond. The cost generally covers both performance and payment bonds.

Subcontractor performance and/or payment bonds are commercial bonds and would rarely, if ever, be required by the government in the contract. 

Sorry that I didn’t remember that earlier. I don’t use my desktop anymore and don’t keep a printed set of the contract clauses. That the trouble with electronic contracts and particularly true for IBR (inclusion by reference). 

The bond requirements for the contract are defined in the clause at 52.228-15, and  the specific forms to use. 

Generally, the government doesn’t require any other  payment and performance bonds in the solicitation and contract. 

“28.000   Scope of part.

This part prescribes requirements for obtaining financial protection against losses under contracts that result from the use of the sealed bid or negotiated methods. It covers bid guarantees, bonds, alternative payment protections, security for bonds, and insurance.”

“28.102-3   Contract clauses.

(a) Insert a clause substantially the same as the clause at 52.228-15, Performance and Payment Bonds—Construction, in solicitations and contracts for construction that contain a requirement for performance and payment bonds if the resultant contract is expected to exceed $150,000. The contracting officer may revise paragraphs (b)(1) and/or (b)(2) of the clause to establish a lower percentage in accordance with 28.102-2(b). If the provision at 52.228-1 is not included in the solicitation, the contracting officer must set a period of time for return of executed bonds.”

The clause at 52.228-15 implements the requirements of FAR 28. 

Paragraph (g) in the payments clause at 52.228-5 states that the government will reimburse the contractor for the paid premiums for the performance and payment bonds. 

——————————-

Edit:  I sense that it is very difficult for some here to be able to use inferential thinking skills to understand that the performance and payment bonds described and required by said clause 52.228-5 meet the definitions in 28.001 for bonds, performance bonds and for payment bonds. 

And since there is no other requirement in the contract for additional performance and/or payment bonds, paragraph (g) refers to the only performance and payment bond requirement in the contract.

——————————

If the contract requires other payment and performance bonds then the paragraph (g) would also cover that.

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On ‎9‎/‎27‎/‎2019 at 3:24 AM, joel hoffman said:

The bond requirements for the contract are defined in the clause at 52.228-15, and  the specific forms to use. 

The bond requirements for the contract are defined in the clause at 52.228-15, and  the specific forms to use.

 

Bonding guiding uniform policies and procedures for acquisitions are provided for in the FAR.  The policies and procedures provide for allowable and allocable pricing of all bonds and for the payment/reimbursement of said bonds to a contractor. No specific strategy, practice, policy or procedure in the dictates in the FAR that they cannot  be.  If it is in the best interests of the Government and therefore not addressed in the FAR, nor prohibited by law (statute or case law), Executive order or other regulation, that the strategy, practice, policy or procedure of reimbursement of a contractor for subcontractor bonds is a permissible exercise of authority.

Period!  

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On 9/27/2019 at 5:24 AM, joel hoffman said:

The bond requirements for the contract are defined in the clause at 52.228-15, and  the specific forms to use. 

Generally, the government doesn’t require any other  payment and performance bonds in the solicitation and contract. 

True statement. Fact.

On 9/27/2019 at 5:24 AM, joel hoffman said:

And since there is no other requirement in the contract for additional performance and/or payment bonds, paragraph (g) [of 52.228-5 ] refers to the only performance and payment bond requirements in the contract.

——————————

If the contract requires other payment and performance bonds then the paragraph (g) would also cover that.

Other bonds not contractually required but only required by prime for subs,  which don’t protect the interests of the government as an obliges,  may be allowable in a negotiated contract. They would also be part of the contract cost in a competitive acquisition.

However such premiums  are calculated as an indirect cost, based upon the net price of the subcontract. As such they would be reimbursed on a prorata basis as the subcontract work is performed. 

It’s  not in the best interests of the government to reimburse non-required bond costs upfront that are spread over the cost of the subcontract and that are prime contractor required to protect the financial interests of the prime contractor and its bonding company. The government has no need for such bonds.

That’s consistent with the GAO interpretation of the law generally prohibiting advance payment before earned progress.

But I don’t care how Carl personally does it as I don’t have any control over it. 

 

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20 hours ago, joel hoffman said:

However such premiums  are calculated as an indirect cost,

Not a factual statement.  The uniform policies and procedures of the FAR Part 31 DONOT provide  that bonding costs of subcontractors shall be either an indirect cost or direct cost.   Such determination is left to the accounting practices of the particular firm.

Further, indirect/direct cost has no bearing on payment for bonds, either primes or subcontractors.  By example consider this.   Sealed bid firm fixed priced contract the Government does not know how or where in the contractors pricing scheme that they placed bond costs, for either bonds required by the government of the prime or those of the prime required of subcontractors.   They might be direct or indirect who knows.   The prime shall be reimbursed for the amount of bond premiums for performance and payment bonds after the Contractor has furnished evidence of full payment to the surety.  

 

20 hours ago, joel hoffman said:

It’s  not in the best interests of the government to reimburse non-required bond costs upfront that are spread over the cost of the subcontract

Not a factual statement.  Best interest of the government would have already been determined by placement of 52.232-5(g) specifically in a contract.

 

20 hours ago, joel hoffman said:

That’s consistent with the GAO interpretation of the law generally prohibiting advance payment before earned progress.

 Not a factual statement.   The GAO's interpretation of law regarding payment and  bond premiums is that they agree that reimbursement of full bond premiums is allowable if the contract so provides for such payment and the contractor has earned the payment by substantiation of providing the bonds.  Just as the contractor earns the right for payment for material delivered to site regardless of who has brought the material to the site, subcontractor or prime.

 

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Since you still don't understand what they meant by "full payment", there is no further use discussing this.

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On 9/26/2019 at 11:35 AM, Don Mansfield said:

joel,

That's not how definitions work. A word or term used in one clause does not necessarily have the same meaning when used in a different clause because the two clauses are in the same contract.

You are ignoring the clear rule in FAR 1.108(a):

Thus, the definition of "bond" at FAR 28.001 only applies to FAR part 28. If a contract contains the Definitions clause, then that definition extends to clauses prescribed in FAR part 28. FAR 52.232-5 is not prescribed in FAR part 28, so there's no basis for your assertion that the definition of "bond" at FAR 28.001 applies to FAR 52.232-5.

I think this thread is a good example of what can go wrong when we lack intellectual humility

Don, the contract specifically defines the requirements for performance and payment bonds. One doesn't have to refer back to FAR definitions. 

If there is no mention of discretionary performance bonds covering subcontractor default in the contract, it wont be read into the contract requirements..

"[A] writing is is interpreted as a whole, and all writings that are a part of the same transaction are interpreted together, Restatement, Second, Contracts Section 202(2)."Since language derives its meaning largely from the context in which it appears, an attempt to interpret a word, term, or clause independent of the remainder of the contract document may distort its meaning and thus not accurately reflect the intent of the parties."**

**See "Analysis of Contract Language of Contract Documents" in Chapter 2, CONTRACT INTERPRETATION, (my latest is the Fourth Edition (2006) of the Book Administration of Government Contracts by Cibinic, Nash and Nagle.

Some more excerpts below:

  •  "One must interpret the contract as a whole to avoid conflict. Preference is given to an interpretation of a contract which accords reasonable meaning to each of its provisions...Thus , a court or board will will look for an interpretation that avoids contract language ambiguous"

The book cites a court decision in Wunschel & Small, Inc.v. United States, 1 Cl. Ct. 485 (1982), aff'd, 714 F.2d 161 (Fed. Cir. 19830).

  • The court "read two clauses together and found that the contract evinced a single intent of the parties."

It also cited an Engineer Board of Contract Appeals (combined with the ASBCA in 2000) Decision involving discretionary subcontractor bonds.

  • [in] Lane Constr. Corp., ENGBCA 5880, 93-1 BCA Section 25,448. "[T]he contractor alleged that it was entitled to reimbursement for payments it made for discretionary performance bonds covering subcontractor default under a contract line item containing a "not to exceed" amount for performance and payment bonds. The board denied the appeal, holding that, reading the contract as a whole, the line item only applied to bonds required under the Miller Act."

I don't have subscriptions to legal search services, so wasn't able to find the ENG Board decision to read it. I will have to drive downtown to the local USACE Law library to read it.

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2 hours ago, joel hoffman said:

Since you still don't understand what they meant by "full payment", there is no further use discussing this.

 

Joel – It is you that does not understand and has, in my view, so convoluted the matter of payment for bonds that you have presented a stance that is not supported in fact.

You now bring in the issue of a definition or understanding of “full payment” and it is you, not me, who should have good understanding,  that has turned yourself into a hole.

To this point and your most current statement as quoted above you have made the following points but never, yourself brought up a need for understanding “full payment” until now. Wording that I might add has no bearing on the issue at conflict, payment of subcontractor bond premiums in a request for payment made by a prime.  Specifically you have said the following in this thread about “full payment”.

“The other point is that full payment refers to “when” the payment is allowed not “what” the payment is for.” 

“The term “ full payment” had nothing to do with allowing immediate subcontractor bond reimbursement”

“The other point is that full payment refers to “when” the payment is allowed not “what” the payment is for.”

So let’s one more time dissect the 52.232-5(g).

It says this –“Reimbursement for bond premiums. In making these progress payments, the Government shall, upon request, reimburse the Contractor 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. The retainage provisions in paragraph (e) of this clause shall not apply to that portion of progress payments attributable to bond premiums.”

In the context of this part of the FAR clause you are correct about the when and not the what in that a contractor can be paid for regarding performance and payment bonds upon providing evidence that all bond premiums have been paid.

So here is my example. 

Sealed Bid FFP. Contract awarded. No separate CLIN for mobilization or bonding just four CLINS that are for painting the outside of 4 huge buildings that are priced lump sum for each building.  The CLINS in total equal $250.000.00 .  The contractor after award at the post award orientation meeting submits to the government a request for payment of $7,000.00 for Bond Premiums. At this point no work has begun on the facilities.  Evidence attached to the invoice includes 3 receipts from 3 separate sureties that state they are receipts for the “full payment” of performance and payment bonds.  One receipt is addressed to the prime, the 2 other are addressed to first tier subcontractors.

In this example the government would first do verification of the bonds such as request the contractor to provide the originals of the primes bonds and copies of the subs bonds or whatever other verification the government elects to use.

Upon verification the government would make payment on a form (that might even look something like a ENG 93) and that form would look like this along with the annotation in the description/notes section of the form that the payment is for “bond premiums” –

                                                CONTRACT                                                                           PAYMENT THIS PERIOD

ITEM NO.                DESCRIPT.             QTY/UNIT               UNIT PRICE           AMT                        QTY/UNIT               AMT

1                              BLDG 1   1 LS                         $50,000.00              $50,000.00                             0              LS            $7,000.00

2                              BLDG      1 LS                         $100,000.00            $100,000.00                            0              LS            $0.00

3                              BLDG      1 LS                         $75,000.00              $75,000.00                              0              LS            $0.00

3                              BLDG      1 LS                         $25,000.00              $25,000.00                              0              LS            $0.00

                                                                                                                                                TOTAL PAYMENT $7,000.00

This example demonstrates what “full payment” is and how it is handled to pay a prime contractor. 

Your argument about this example is not that the amount of $7,000 could be paid if it was ONLY the primes bonding but that it could not be paid because it includes subs bonding as well.  

As I have pointed out repeatedly neither the clause nor a definitive FAR reference, nor case law, supports not making  the payment to a prime for bond premiums that include subcontractor bond premiums (fully evidenced).   In support of my view I have repeatedly pointed to the clause which makes no delineation and provides no definition of what bond premiums can or cannot be paid for, supported that bond premiums of a subcontractor are allowable costs in a government contract, and offered, exacting references that show that prime contractors do get subcontractor bonding and provided a GSBCA case that clearly points out that a government prime contractor submitted an invoice that included sub bonding in a payment request and was paid and that demonstrates that payments are in fact made to the prime for such costs.

I agree no further discussion is needed because of your lack of understanding and clear reading of a FAR clause and supporting factual references.

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@joel hoffman,

Nothing you posted proves that the definition of "bond" at FAR 28.001 is the applicable definition when that word is used at FAR 52.232-5(g). You continue to ignore FAR 1.108(a) and the Definitions clause. The Definitions clause specifically makes the definitions at FAR 28.001 applicable to clauses prescribed in FAR part 28--not other clauses prescribed in other parts (like FAR part 32). You continue to write that contracts must be read as a whole, but your reading excludes the Definitions clause.

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argument from authority

 

Examples:

when I was at this agency four score ago,

in my experience,

when I was running things,

when I signed the big contracts,

from my professional expertise,

when I rebuilt the Panama Canal,

after modifying eight million contracts,

back when I knew that famous guy,

from negotiating with the big boys I learned,

just like this guy told me on the phone

 

 

 

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Spent the afternoon at the County Law Library researching some cases in Lexis.

On 27 Oct 1978, the DAR Council approved the recommendations to change DAR 7-602.7 payments to add new 7-602.7(e) to allow the entire amount of the premiums for Miller Act performance and payment bonds in lieu of prorating in progress payments upon evidence of paid premiums. 

Both the ASPR and FPR payment clauses were modified- to specifically allow upfront payments for the Miller Act payment bonds required under the contract. 

The modified FPR payments to Contractor Clause was adopted in June 1979. It redesignated former paragraph (e) as (f) and added new paragraph (e) :

“(e) If Miller Act (40 USC 270a-270e) performance or payment bonds are required under this contract, the Government shall pay to the Contractor the total premiums paid by the contractor to obtain the bonds. This payment shall be made at one time to the Contractor together with the first progress payment otherwise due after the Contractor has (1) furnished the bonds (including coinsurance and reinsurance agreements when applicable), (2) furnished evidence of full payment to the surety company, and  (3) submitted a request for such payment. The payment by the Government to the Contractor of the bond premium shall not be paid as increments of the individual progress payments and shall not be in addition to the contract price.”

The above was footnote number 5 to the Appeal of Reese Industries, 83-1 BCA P 16245 (Dec 22, 1982). The Appeal was in response to KO Decisions on five separate Air Force construction contracts. The body of the decision noted that both ASPR and FPR clauses were similar but only quoted the language of the FPR clause. 

The ASPR clause was ASPR 7-602.7 with new paragraph (e). 

The ASPR clause was later updated to use the current wording in paragraph (g) (then paragraph (e)) of the Payment clause.  

So the DAR and FPR committees “amended” the payment clauses to provide   for upfront one time payment of “total” premiums of Miller Act Bonds when required by the contract. The initial amendment did not allow for payment of the bond premium as increments of individual progress payments and was not in addition to the contract price. 

The gist of the five ASBCA claims appeals by the contractor was that it had not included the cost of the bonds in the contract price, did not read the clause that was in the five different contracts and had never been bonded before these contracts. It thought that it could be reimbursed for the bond premium in addition to the contract price. I noted  that the contract payment clause was included by reference, not directly included in the body of the solicitation.

Another reason why I don’t like clauses IBR. 

The appeals were denied. 

I mentioned this Decision because it included the language of the new clause(s) that resulted from the 1972 Committee 13-C recommendation, which slowly worked its way through various reviews, the 1977 GAO Decision previously discussed , more committees and finally into the clauses.

AND it was only applicable to Miller Act Bonds when required by the contract. 

———————————————

Tomorrow, if I find the time, I will add another post concerning the Corps of Engineers Board of Contract Appeals Decision in the Appeal of The Lane Construction Corp, dated September 21, 1992. 93-1 BCA P 25448 , ENGBCA No. 5880, 1992 WL 246119. 

The ENGBCA was combined with the ASBCA in 2000 due to government reorganization of Appeals Boards for cost cutting reasons. 

The Decision is cited in the 2006 4th Edition of Administration of Government Contracts, as I mentioned this morning. 

Contract Interpretation —Subcontractor Bond Costs — In a fixed price contract, the unit price schedule providing for reimbursement of the contractor for its actual bond premiums [priced on the basis of “Not to Exceed”] when read in harmony with other applicable contract provisions included reimbursement for the actual bond premiums paid for required Miller Act performance and payment bonds purchased for the protection of the United States but not for the actual premiums for the purchase of performance and payment bonds for the prime contractor's protection. “

Paragraph (g) of the payments clause in that contract used the same language as the current clause. 

The case is complex but the Board did state that paragraph (g) is applicable to bonds required by the contract...

More details tomorrow or as soon as time permits. 

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19 hours ago, Don Mansfield said:

@joel hoffman,

Nothing you posted proves that the definition of "bond" at FAR 28.001 is the applicable definition when that word is used at FAR 52.232-5(g). You continue to ignore FAR 1.108(a) and the Definitions clause. The Definitions clause specifically makes the definitions at FAR 28.001 applicable to clauses prescribed in FAR part 28--not other clauses prescribed in other parts (like FAR part 32). You continue to write that contracts must be read as a whole, but your reading excludes the Definitions clause.

Well, Don,  the Board decisions didn’t  agree with you that the performance and payment bonds mentioned in the Payments clause aren’t the Miller Act Bonds required by the contract. There were no other bonds required by the involved contracts . 

And Nash and Cibinic apparently didn’t, either in the contract interpretation section that I mentioned. 

Since you are a Professor, you probably have access to both the book and Lexis to read the decisions cited in Administration of Government Contracts. The decisions include other citations, some of which are pertinent.

while we are at it, the Definitions clause isn’t applicable because the word or term isn’t defined in Part 2 nor is it  “defined” in 52.232-5 separately from the specific requirements in 52.228-15 or elsewhere in the contract, if applicable..

 Thus, when there are no other required bonds, the performance and payment bonds refer to the MillerAct bonds (SF 25 and SF 25a), whether they be from individual sureties or acceptable Corpoate Sureties. 

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Joel - An actual link to the specific decisions you note would be appreciated.  As you have implied throughout this thread with regard to me your interpretation of a board case is yours and without substantiation of the contents of the decisions you have cited I have trouble accepting your one man read.

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3 hours ago, joel hoffman said:

Well, Don,  the Board decisions didn’t  agree with you that the performance and payment bonds mentioned in the Payments clause aren’t the Miller Act Bonds required by the contract. There were no other bonds required by the involved contracts . 

And Nash and Cibinic apparently didn’t, either in the contract interpretation section that I mentioned. 

Since you are a Professor, you probably have access to both the book and Lexis to read the decisions cited in Administration of Government Contracts. The decisions include other citations, some of which are pertinent.

while we are at it, the Definitions clause isn’t applicable because the word or term isn’t defined in Part 2 nor is it  “defined” in 52.232-5 separately from the specific requirements in 52.228-15 or elsewhere in the contract, if applicable..

 Thus, when there are no other required bonds, the performance and payment bonds refer to the MillerAct bonds (SF 25 and SF 25a), whether they be from individual sureties or acceptable Corpoate Sureties. 

@joel hoffman

Nothing that you've cited dealt with the issue of whether the definition of "bond" at FAR 28.001 is the applicable definition for interpreting "bond" as used in FAR 52.232-5(g). In that respect, your citations are inapposite.  

 

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Carl, there is no “link to the specific decisions” that I noted. They are available in hardbound copies of the referenced BCA’s or available through WESTLAW, LEXIS,  or other subscription based legal services. I visited the Mobile County Law Library yesterday upon learning that the Mobile District Corps of Engineers had disposed of all their hard copy legal references plus it was year end for them. 

I used the Law Library’s WESTLAW service. I was able to print out a six page hard copy of the Appeal of the Lane Construction Corp ENGBCA , which was cited in the 2006 Fourth edition of Administration of Government Contracts. In  WESTLAW It is cited as WL case number 246119.  It is found in 93-1 BCA P 25448 (ENGBCA No. 5880, 1992.

 I was also able to print out a couple pages of the Reese Industries Appeal of 5 Air Force contract KO Decisions , That case is in 83-1 BCA P 16245 (ASBCA) . The pages I printed contained the wording of the June 1979 FPR amendment to the Payments clause, ensuing from the 1972 Committee 13-C recommendation that went through other reviews including the 1977 GAO decision that we have debated. The amended clause inserted the new paragraph (e) (now (g) in the current clause)  at 52.232-5. I quoted it last night to show that it specifically limited upfront reimbursement to the Miller Act required bonds for the protection of the Government. It did not, as y’all have insisted, provide for upfront reimbursement of subcontract bonds. 

You may purchase a copy of Administration of Government Contracts. I bought two editions myself and my office bought one edition. Your office should purchase one if you don’t have it. It’s available at some College Bookstores or order on-line. 

—————————————

Regarding the Lane Construction Corp. Appeal. The clause at 52.228-15 wasn’t in the FAR until Sep 2005. My 1 January 1996 version instructs the government to specify in the solicitation (a) The requirements for the (performance and payment) bond(s) (exceeding $25k then) ; (b) The penal sum of each bond ; and (c) The deadline for submitting acceptable bonds.

Note that the SF 1442 includes three references to the required bonds at blocks 12A. ,  12B, and 18. 

Information for Bidders IB-9 provided this information, including the Standard Forms 25 and 25A.  

The Pittsburgh District included Line item No. 0001 for Reimbursement for Actual Performance and Payment Bond PREMIUMS (See Special Clause SC- 19) .    Unit Price:  NOT TO EXCEED.    AMOUNT _-_-_-_.   Lane bid $450,000. 

SC-19 “Payment for Performance and Payment Bonds” stated in “pertinent part” that “The requirement For performance and payment bonds is applicable only two bids of $25,000 or more.

“a. Paragraph (g)  of the contract clause entitled “payments under fixed price construction contracts quote provides for reimbursement of premiums paid to the surety or sureties for performance and payment bond. In order to ensure sufficient funds have been set-aside for payment of such premiums, bitter shall insert in bid item number 1 an appropriate not to exceed dollar amount. Failure of bidders to insert a not to exceed dollar amount in bid item number 1 will cause the bid to be rejected as non-responsive.”

“b. Not withstanding the contract clause and titled “payments under fixed price construction contracts,” the contractor shall not be reimbursed an amount which exceeds the dollar amount set forth in bid item number 1”

“Contract General Provision number 54, referred to in SC- 19 (a) , was 52.232-5 (APR 1989) with the paragraph (g) language. 

“Lane Paid a total of $452,321In premiums to sureties for various performance and payment bond. Of this title, the core of engineers reimbursed the lane pursuant to item 1 for its actual premiums in the amount of $399,628 for required Miller act performance and payment bond issued for the protection of the United States as Obligee with Lane named as the principal.”

” Lane paid $52,693 to purchase a subcontractor labor and material bond and a subcontractor performance bond indemnifying Lane as the obligee against default by its major subcontractor[ ]. Lane’s corporate practice is to require coverage of a major subcontractor by a subcontractor performance and payment bond issued for lands protection, if Lane has not had substantial experience with that subcontractor. “

 The subcontract performance and payment bond applied solely to performance of work under this contract by [its subcontractor]. Although Lane required [the subcontractor| to obtain these bonds, Lane paid the premiums directly to the surety. The payment to the surety was in addition to the subcontract price.

“Lane requested the Corps of engineers to reimburse it under item number one for the actual premiums for (its subcontractor) bonds in the amount of $50,372. This amount represents the difference between the not to exceed amount of $450,000 and the amount of $399,628 that the Corps  paid lane for the required Miller at performance and payment bond is for the United States is protection. The Corps  denied Lane’s request. “

( to be continued  . Sorry but I have to go to my wife’s volleyball team’s match.  While the direct subject of the claim is whether the contractor could be reimbursed for the subcontract bonds under bid item number one, it raised the interpretation of paragraph (g) in clause 52.232-5 and other reasons. I will explain ASAP. )

 

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Okay Joel – BUT before you go on and on about how you read the cases I think you will find the following case to be very important with regard to your citation of the Lane and Reese. 

You see specifics matter and I again state that your statement    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.”  is a statement that is “not correct.”   Rather facts support determination of what can be reimbursed as “bond premiums” is determined on the facts of specific contract .

Specifically I provide the following reference and quotes…..

http://www.asbca.mil/Decisions/2000/52889.pdf

“…Subparagraph (a) of the PAYMENTS clause obligated the Government to pay the

amount established in the contract as the fixed price, which was determined by the parties’mutual agreement to be the specific sums contained in Bean Stuyvesant’s sealed bid. That bid was prepared in accordance with the contract’s Bidding Schedule, which required CLIN 0007 BOND COSTS to be bid as a flat sum to “include the Cost of Bid Bond, Performance and Payment Bonds.” 1 Specific project requirements paragraph 17 reinforced the nature of the Government’s obligation by stating “[P]ayment for Bond Cost will be made pursuant to contract lump sum price as stated in the Bidding Schedule.”The Government’s attempted reliance upon subparagraph (g) of the PAYMENTS clause to limit Bean Stuyvesant’s recovery to reimbursement for bond premiums is misplaced. The language in subparagraph (g) has been interpreted repeatedly to be procedural in nature, giving the contractor the option of receiving reimbursements for performance and payment bond premiums as part of progress payments. That portion of the PAYMENTS clause only describes “methods and procedures by which [repayment of bond premiums] will be made and [has] no bearing on the contract price which is identified elsewhere in the contract.” Reese Industries, ASBCA Nos. 25862 et al., 83-1 BCA 16,245 at 80,744, discussing a predecessor version of FAR 52.232-5(g) and citing

RESTATEMENT CONTRACTS § 230; see also Spickard Enterprises, Inc., ENGBCA No.

4509, 81-1 BCA ¶ 14,878 and Moulder Bros., ASBCA No. 31769, 86-3 BCA ¶ 19,297.

Subparagraph (g) does not confer entitlement upon a contractor for the reimbursement of

bond premiums, nor does it restrict the contractor’s right to recover the lump sum bid as

bond costs.

 

1This appeal is distinguished from two decisions relied upon by the Government. In both D&J Construction, Inc., ENGBCA No. 5291, 88-2 BCA ¶ 20,678 and The Lane Construction Corp., ENGBCA No. 5880, 93-1 BCA ¶ 25,448, the Government included language in the bidding schedule restricting bond costs to reimbursement for actual bond premiums paid. Such language was not used in the instant bidding schedule.

In addition to the PAYMENTS clause, the Government also argues it restricted the

contractor’s recovery of bond costs to reimbursement for premiums by including an

excerpt from a Corps of Engineers’ acquisition regulation, intended for use with a

superseded DFARS clause, in paragraph 29 of the instructions to bidders. That instruction

was not part of the contract, and cannot change the plain meaning of the bidding schedule, especially where all other contract terms support the contentions of Bean Stuyvesant.

 

Using standard procurement clauses from the FAR and DFARS, the Government

established a fixed-price construction contract and agreed to pay the price provided in the

contract. The contract price was based upon the Bidding Schedule, in which Bean

Stuyvesant submitted $275,000 as bond costs which it asserts included “indirect costs”

associated with creating and maintaining its bonding capacity. Subsequent to award the

Government attempted to reduce the agreed-upon sum for bonds to only the expenses of

bond premiums. This would convert one element of the fixed-price construction contract

into a cost-reimbursable item, which was inconsistent with the contract’s terms. The

Government is obligated under the contract to pay the full amount included as CLIN 0007 BOND COSTS. Although the Government argues that the amount is excessive and cannot be substantiated under even a broad reading of “all costs” as described in DFARS 252.236-7008, the Government’s protestations come too late. …”

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Lane Construction Corp. continued...

Lane filed a certified claim on December 20, 1990, requesting the KO to reimburse Lane under line item 1 for the subcontractor performance and payment bonds in the amount of $50,372. The KO denied the claim and Lane filed a timely appeal. 

The Decision:

The parties filed motions for summary judgement raising the question of whether Lane is entitled to reimbursement under Line Item number1.  The question was whether line item 1 covered reimbursement of Lane for its actual costs to purchase discretionary subcontract bonds for Lane’s protection. 

The Corps contended that the contract requires it to reimburse Lane under Item 1 only for the actual premiums paid by Lane for the required Miller Act bonds. Lane contended that Item 1, reasonably interpreted, expressed the Corps’ agreement to reimburse Lane for all of its actual bond premiums up to the not-to-exceed amount bid., including the subcontract bonds.

Resolution of the parties’ respective motions rest in part on the meaning reasonably ascribed to the language of line item 1 stating that,  “[r]eimbursement for actual performance and payment bond premiums (See SC-19.).”

(I am omitting the multiple case citations herein) Contract provisions are interpreted according to their plain, ordinary meaning in the first instance with all provisions considered and read together. Here, we need to determine the objective meaning reasonably applicable to item 1 in the context of all relevant contract provisions read as a whole, giving the contract words their plain and ordinary meeting and considering the contract’s purpose. In this regard, shorthand language used in a bid schedule to describe contract work necessarily does not define the parties’ obligations in great detail. This is the function of the contract’s clauses,  specifications and drawings.

However, when item 1 is considered in conjunction with the contract provisions regarding performance and payment bond, it’s meaning is plain. The parties agreed that the Corps would reimburse Lane for the actual premiums Lane paid to purchase required Miller Act performance and payment bonds up to the not-to-exceed amount Lane inserted in item one of its bid. 

The parties did not agree under item 1 that the Corps  would reimburse Lane for the actual cost for bonds Lane purchased at its discretion to protect it from the subcontractors the faults in contract performance and payment.

In this regard, item one refers to SC – 19.   SC-19 In its title states that it involves “the requirement for bonds” for contracts over $25,000 and directs bidders to place an item 1 an appropriate, not-to-exceed amount in compliance with this requirement. The cross-references back-and-forth between SC 19 and Item 1 reasonably put  bidders on notice that item 1 and SC 19 concern “the requirements for Bonds” under the contract, although SC 19 does not otherwise define the nature of “the requirement”.

Although SC-19 itself does not define what is meant by the reference in its title to “the requirement for bonds“, one may readily determine its intended scope by considering related contract provisions.  IB –9, by its reference to Standard Form 25 and standard form 25A, respectively, specifies the requirement for Miller Act performance and payment bonds for contracts exceeding $25,000. Lane agrees [in its Opposition to the Corps’ Motion for summary judgement and Lane’s cross-motion for summary judgement] that IB-9 bound it to provide required Miller Act performance and payment bonds. 

In this regard, both SC-19 and IB -9 are strikingly similar terms in referring to “the requirement for bonds.” SC-19 is entitled “payment for performance and payment bonds. The requirement for performance and payment bonds is applicable only to bids of $25,000 or more.” IB-9 is entitled, “Performance and payment bonds. This requirement is applicable only to bids of $25,000 or more.”

Here, the wording of Item 1 when read in harmony with other relevant contract provisions, i.e. IB-9 and SC 19, expressly applied only to required Miller Act bonds. As referenced by item 1, SC 19 plainly applied only to “the requirement” for performance and payment bond in contracts over $25,000. In this regard, upon seeing the reference in Item 1 to SC 19, which referred to “the requirement” for bonds, Lane assumed any risk of failing to inquire about the scope of Item one, if it was confused about these reasonably clear provisions.

Lane raises several issues in argument which we address briefly. 

Lane maintains that general provision GP-54 supplies the contractual basis for reimbursement for the premium costs for the subcontractor bonds. However, that provision merely provides methods and procedures for the payment of progress payments and, in conjunction there with, payment on a lump sum basis for performance and payment bond premiums where there is an otherwise underlying contractual obligation to pay such costs. See Reese Industries, ASBCA No. 25862, et seq.,[there were 5 identical claims on 5 Air Force contracts] 83-1 BCA (section) 16,245; Spickard Enterprises, Inc., ENGBCA No’s. 4509, 4510 , 81-1 BCA (section) 14,878. A search of the contract documents does not reveal any provision, and none has been called to our attention, directly imparting a Corps agreement to reimburse Lane for its purchase of subcontractor bonds for its own protection.Thus, general provision 54 when read in conjunction with item 1, SC 19, and IB-9 does not provide contractual authority establishing that the Corps agreed under item 1 to reimburse Lane for its actual premiums for the subcontractor or bonds, which were not required bonds.

[Lane’s remaining arguments concern whether or not subcontract bond premiums are allowable costs under the contract. The board agreed that subcontractor bond cost may be included in the contract price, However nothing in the argument would indicate that those bond premiums were to be included or allowable under bid item number 1. ]

The Decision stated: “The central issue here is whether the parties intended the Corps to reimburse Lane for these actual cost under item 1 absent any equitable adjustment. We have determined, for the reasons given, that item 1, as defined by SC-19 and IB-9, only covered reimbursement of Lane for its actual premiums for required Miller act performance and payment bonds purchased for the United States protection. While allowing reimbursement for subcontract bond costs, FAR 31.205-4 does not apply to aid Lane here because the parties simply did not agree that item 1 covered such costs...”

The Board concluded: “ For the foregoing reasons, therefore, Respondent’s Motion for Summary Judgment is SUSTAINED. Appellant’s Cross-Motion for Summary Judgment is DENIED. The Appeal is DENIED.”

The most relevant point here was that, absent another requirement in the solicitation/contract , paragraph (g) of the contract clause doesn’t refer to upfront payment for discretionary, prime contractor required bonds from its subcontractor(s) for its protection. It only applies to bonds that are required by the contract. 

In this case, the line item for upfront reimbursement wasn’t applicable to subcontract bonds. 

Thus, reimbursement for those costs would be recoverable on a prorated basis under the paragraph (b) of 52.232-5 on progress estimates of the work associated with the applicable subcontract(s). 

Remember that it wasn’t allowable to include the “full” (“total”) amount of required bond premiums in a single progress payment before the paragraph (g) was added to 52.232-5. 

So, the total cost of subcontractor bond premiums (not covered by (g)) can’t be considered as “progress”, separate from the earned progress of the associated bid items for the subcontract. 

Unfortunately, Lane Construction Corp. allegedly included (most of) those costs in Bid Item 1, which only covered actual premiums for contractually required bonds. 

The Decision did indicate that increases in subcontractor bond costs due to equitable adjustments affecting that subcontractor could be allowable under the contract -just not under bid item 1. 

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Carl, I read your cited case. That was a lump sum bid item for bond costs. It was simply an argument about paying the entire bid item lump sum price even though actual costs were less. There the government had no basis to treat the bid item as NTE. 

In Lane, the government used a not-to-exceed bid item price for premiums for “required bonds”. 

I remember that the Corps used a test program temporarily back in the early to mid 90’s, where certain bid items like bond premiums, mobilization and prepatory work, etc. were set up as Not-to-Exceed based pricing, often to discourage front end loading. It was a PITA to administer, with lots of arguments.

 

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Since it appeared that Lane, as the low bid contract awardee,  had accidentally included $50,000 of legitimate, otherwise allowable subcontract bond costs in the wrong bid item, I might have been inclined to consider recommending to the KO to modify the contract to redistribute the remainder of the bid item 1 NTE allowance to the applicable bid item covering that subcontract. Our lawyers would probably have nixed that idea as setting a precedent. It was a pretty big hit though. And Lane would have still been the low bidder at the same contract price. But...

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8 hours ago, joel hoffman said:

Here, the wording of Item 1 when read in harmony with other relevant contract provisions, i.e. IB-9 and SC 19, expressly applied only to required Miller Act bonds. As referenced by item 1, SC 19 plainly applied only to “the requirement” for performance and payment bond in contracts over $25,000. In this regard, upon seeing the reference in Item 1 to SC 19, which referred to “the requirement” for bonds, Lane assumed any risk of failing to inquire about the scope of Item one, if it was confused about these reasonably clear provisions.

So in other words the pendulum for reimbursement of sub bond premiums swung on two terms of the contract applicable to Line Item 1 and not 52.232-5(g).  This position of the BCA is supported by this statement in the more recent case I referenced where it states..

10 hours ago, C Culham said:

The Lane Construction Corp., ENGBCA No. 5880, 93-1 BCA ¶ 25,448, the Government included language in the bidding schedule restricting bond costs to reimbursement for actual bond premiums paid. Such language was not used in the instant bidding schedule.

 

 

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Carl, the. Bean Stuyvesant Decision involves different issues than the Lane Construction Decision or the Reese Decision. The Bean Decision involved a lump sum  Bid item to pay for bonding.  

The Lane Construction Corp involved a not to exceed priced bid item. 

The main point of relevance to this discussion in the Lane Decision is that paragraph 52.232-5(g) doesn’t authorize upfront reimbursement of subcontractor bonds, unless the contract otherwise so specifies such. The only mention of bonding requirements in the Lane  contract was for prime  contractor performance and payment bonds required by  the Miller Act using Standard Forms 25 and 25A, respectively.

To separately complicate matters, that contract included a separate, not-to-exceed bid item for bond reimbursement. Lane should have included the subcontract bond in the applicable bid item(s) involving the bonded subcontractor. It didn’t, so had to eat the $50,000 cost of that bond. The Decision really concerned what was reimbursable under that specific bid item. The Board mentioned  that paragraph 52.232-5(g) did not cover subcontract bonds unless they were otherwise required  or specifically authorized for upfront payment.  They weren’t.

In the Reese decision, the solicitation, including the first version of the added paragraph (e) in 52.232-5 for upfront bond reimbursement, specifically limited upfront reimbursement to the Miller Act required bonds and stated that the bond cost was to be included in the contract price. There wasn’t any separate bid item for bonds. However, the clause was included by reference and the contractor didn’t read it.

He thought that the bond was separate from the contract price, so didn’t include anything in his bid for the required bonds. Thus,  Reese did not get reimbursed for any of his bond costs when he submitted the paid invoices asking for reimbursement. . 

In Bean, the government owed the contractor the price of the lump sum bid item. Paragraph 52.232-5(g) wasn’t really applicable  in conjunction with a pre-priced lump sum bid item for bonds. 

I agree with the Decision. 

I also know from long term experiences with dredgers that they will front end load the.  BId schedule when given an opportunity. This was such an opportunity.

There is no need to have a separate Bid Item for bonds. 

I think I mentioned that using separate lump sum bid items for bonds invited all sorts of problems. There was a test program for that in conjunction with an effort to discourage front end loading where we used certain language that allowed us to only pay, for instance, the receipted bond premiums and the rest of the bid item was paid at the end of the contract. The whole thing was a mess for a year or two.  

You are correct that the specific facts of each contract will determine what is an allowable cost and how the contractor can recover the bond cost.

Our debate has been over whether or not the paragraph (g) permits the contractor to be reimbursed upfront for subcontract bond premiums vs. the alternative of prorating it according to earned progress for applicable subcontracted work (I.e., 50% work accomplished includes 50% subcontract  bond reimbursement per paragraph (b)).

A separate bid item for bond payments involves additional complications, whether prices are not-to-exceed or lump sum. 

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As an aside, it is unwise to include a separate, lump sum or not-to-exceed line item for bonds in construction contracts that include substantial unit priced work line items with estimated quantities. 

The final cost of the bonds to the contractor will generally depend upon the final quantities of unit priced price items in the contract. The bonding agency or the surety will follow up with the contract price changes and settle up at the end of performance.

Its better to just let the contractor spread the bond costs across all the line items and request upfront bond premium reimbursement per the Payments clause. 

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11 hours ago, joel hoffman said:

The main point of relevance to this discussion in the Lane Decision is that paragraph 52.232-5(g)

Joel - You have gone to great lengths to further confuse the matter just as I suspected you would.  Most specifically you synopsized, implied  or otherwise quoted the Lane decision.   In the lengthy effort  throughout this thread to the most recent  there is not one substantive statement, nor one reference by the BCA to "52.232-5(g)", made by other than you that provides that  a contractor cannot be reimbursed for subcontractor bonds pursuant to 52.232-5(g) other than if the contractor has a USACE contract.  If I have missed it please quote the statement by the BCA NOT your own twist on the what the case might or might not say.

 

10 hours ago, joel hoffman said:

As an aside, it is unwise to include a separate, lump sum or not-to-exceed line item for bonds in construction contracts that include substantial unit priced work line items with estimated quantities. 

The final cost of the bonds to the contractor will generally depend upon the final quantities of unit priced price items in the contract. The bonding agency or the surety will follow up with the contract price changes and settle up at the end of performance.

Its better to just let the contractor spread the bond costs across all the line items and request upfront bond premium reimbursement per the Payments clause. 

Now you head down a separate path postulating your opinion once again about what to or not to do regarding CLINs and bonding costs but have not provided substantiation (for other than the USACE)  that supports this statement as being correct.

 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.”

To these points I continue with my conclusion that unless you can provide and quote a specific statement to the contrary you are seriously confused and the above statement by you in this thread is not correct  that a contractor "must" handle subcontractor bonds in one certain way and can't be reimbursed for them.  The contract might dictate such in which case the contractors request for reimbursement or payment as a progress item will be dictated by what the contract says.  If not dictated there is no substantive reference that unequivocally states that a prime contractor may not be reimbursed for subcontractor bond costs under 52.232-5(g).

PS - I hope efforts throughout have helped you understand that there are others, myself included, that have participated in this ad naseum discussion that have extensive experience  in administering construction contracts, reviewing and processing consents of surety, dealing with sureties and their bonding agencies, negotiating and dealing with Tender and Release agreements, Takeover agreements, etc., etc. , handling construction progress payments with numerous CLINs and SubCLINs, etc that are inclusive of bond premiums and which may involve multiple subcontractors.   Likewise "people like me" can and do a mighty fine job of interpreting contracts.  Thank you!

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