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Performance and payment bonds


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I'm coming across RFPs where there is a 20% performance (of bid value) and 20% payment bond required in the event you get the contract.  Unclear to me how it works mechanically though.  Are you supposed to submit bonds on day one essentially for 40% of the contract value?  And do they hold on to those for the duration of the contract?  And do we know when they release those - whether immediately upon end of the contract or for a longer period thereafter?

(40% just seems like a very high number to me...)

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Don’t know what type of contract the bonds are required for.  Construction? Services? 

Performance and payments bonds (for construction) are sold together with a single premium. The penal amount that you are referring to is 20% of the contract amount (total is 20%). I suggest that you call a bonding agency and get the particulars. 

The government doesn’t “hold on to the bonds” per se. They don’t get “returned” to the contractor. The bonds are effective for the performance and payment obligations required under the contract. If there is a warranty period, then the bonds might or might or not be effective during that period.

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In addition, I don’t know if you have ever been bonded on other contracts. The bonding company and its agency generally investigate and pre-qualify  or qualify the principal, which may take some time. Not all companies are considered bondable. 

Another reason to contact a surety bonding agency and ask those questions.

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Another question not posed is are you referring to bonding with regard to a Federal contract?   If so you may want to refer to Federal Acquisition Regulation (FAR) Part 28, especially subparts 28.1 and 28.2.   I pose the question and provide the reference as in Federal contracting the performance and payment bonds are typically 100 percent and the bid bond is at least 20 percent so your reference to something less is confusing.

Here is a link to FAR Part 28 https://www.acquisition.gov/content/part-28-bonds-and-insurance#i1088580

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4 hours ago, joel hoffman said:

Don’t know what type of contract the bonds are required for.  Construction? Services? 

Performance and payments bonds (for construction) are sold together with a single premium. The penal amount that you are referring to is 20% of the contract amount (total is 20%). I suggest that you call a bonding agency and get the particulars. 

The government doesn’t “hold on to the bonds” per se. They don’t get “returned” to the contractor. The bonds are effective for the performance and payment obligations required under the contract. If there is a warranty period, then the bonds might or might or not be effective during that period.

It's a federal construction contract.  I haven't personally dealt with bonds for federal contracts before, but for other types of contracts, the way it's typically worked is a bank would underwrite the project and principal, and then issue irrevocable bonds to the client (government).  These bonds are then at the discretion of the government as to whether they liquidate them or not (in the event of some breach).  The bank, to protect their exposure, sometimes asks for all or a portion of these bonds to be collateralized with some form of company asset.  The bank also charges fees for issuing these bonds.

Now in terms of these RFPs that require 20% perf and 20% payment bonds, I guess what I'm asking is what the contractor's exposure or "capital at risk" would be.  So is it fair to say that 40% of the value of the contract is the contractor's exposure (again, in the very worst case scenario that breaches result in liquidation)?  If that's the case, it just seems like a lot of capital at risk because you would have to add on top of that the working capital the contractor actually invests in the project. 

I'm just trying to confirm that I'm understanding this 40% exposure thing correctly.  

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44 minutes ago, California2012 said:

It's a federal construction contract.  I haven't personally dealt with bonds for federal contracts before, but for other types of contracts, the way it's typically worked is a bank would underwrite the project and principal, and then issue irrevocable bonds to the client (government).  These bonds are then at the discretion of the government as to whether they liquidate them or not (in the event of some breach).  The bank, to protect their exposure, sometimes asks for all or a portion of these bonds to be collateralized with some form of company asset.  The bank also charges fees for issuing these bonds.

Now in terms of these RFPs that require 20% perf and 20% payment bonds, I guess what I'm asking is what the contractor's exposure or "capital at risk" would be.  So is it fair to say that 40% of the value of the contract is the contractor's exposure (again, in the very worst case scenario that breaches result in liquidation)?  If that's the case, it just seems like a lot of capital at risk because you would have to add on top of that the working capital the contractor actually invests in the project. 

I'm just trying to confirm that I'm understanding this 40% exposure thing correctly.  

A payment bond is separate from a performance bond.  The stated limit is 20% of the initial  contract amount. I suppose that if you default and also don't pay your labor and/or subs and suppliers, then your exposure to indemnify the surety company to complete the project and to pay outstanding payment obligations could be up to 20%  on each bond.

However, as Carl mentioned, the Federal Acquisition Regulations at 28.102-2 generally require much more than 20% penal sums for both performance and payment bonds, unless the KO determines that a lessor amount will be adequate to protect the government's interests. 

The current default limits for initial amount on each bond are 100% of the contract amount.

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