Bonding Secrets 160: No More Compliance Bonds

This is the Bonding Company’s worst nightmare. In this 160th article in our guarantee series, we’ll cover situations where a Performance or Payment Guarantee is not needed! Some of the projects are large and federal, some are private, they are ALL independent. Here we go!

As a point of reference, you can expect federal, state and municipal contracts to require a Performance and Payment (P&P) Security equal to the amount of the contract. They usually do. General contractors working for a private owner, such as building an office building or apartment project, may face the same requirement. This can also apply to subcontractors.

Federal Projects

This area includes all branches of the federal government. Examples: Army Corps of Engineers, General Services Administration, Dept. of Energy, etc. Its contracts are administered following the rules of the Federal Acquisition Regulations (FAR).

The FAR says that a P&P bond is not required on contracts under $150,000.

For contracts of $150,000 and over that require security, there are times when the surety bond requirement may be reduced below 100% or not applied at all. These include:

• contracts abroad

• emergency procurement

• Sole Source Projects

If the bail requirement is mandatory, the FAR lists acceptable alternatives:

• US government bonds (investment)

• Certified check

• Bank Draft

• Money order

• Badge

• Irrevocable credit card

Here’s another option: For contracts made in a foreign country, the government may accept a bond of a bail not listed in T. (Notice 570)

State and Municipal Contracts

Bonding requirements can vary by state, but are generally similar in flavor to the federal one.

Private Contracts

Anything goes. In private contracts, the owner has full discretion to set the bond requirements, including not needing a bond. Keep in mind that the cost of the deposit is added to the contract, so the owner can save some money by No requiring a bond. They may take other precautions to protect themselves. Some examples:

• Requires a hold. These are funds that are withheld from the contractor and are only released when the project is fully accepted.

• Lien releases may be required each month to demonstrate proper payment to vendors and subcontractors

• Control of Funds/Tripartite Arrangement: One payer is employed to handle contract funds

• Joint checks are issued to the contractor and paid under them, to ensure funds reach the intended parties.

• Physical site inspections to check progress

The nightmare

We talk a lot in these articles about how contractors can get bonds and manage them. But it’s interesting to note: A construction company could go on forever, doing state and federal projects, and NEVER get a bonus. It’s true!

If everyone did this, it would be bail’s worst nightmare. But in reality, there are financial advantages to using P&P bonds, which is why a bond is often the first option.