Secrets of Bonding 160: No More Compliance Bonds
This is 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 big and federal, some are private, ALL are independent. Here we go!
As a point of reference, you can expect federal, state, and municipal contracts to require a Performance and Payment Security (P&P) equal to the amount of the contract. They usually do. General contractors working for a private owner, such as building an office building or an apartment project, may face the same requirement. This can also apply to subcontractors.
This area includes all branches of the federal government. Examples: Army Corps of Engineers, General Services Administration, Dept. Energy, etc. Their 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 above that require security, there are times when the bond requirement may be reduced below 100% or waived at all. These include:
- contracts abroad
- emergency acquisitions
- Single Source Projects
If the bond requirement
it is required, the FAR lists acceptable alternatives:
- US government bonds (investment)
- Certified check
- Bank Draft
- Money order
- Irrevocable credit card
Here’s another option: For contracts made in a foreign country, the government may accept a bond of a
bond not listed in T. (Circular 570)
State and Municipal Contracts
Bonding requirements can vary by state, but are generally flavored similarly to federal.
Anything goes. In private contracts, the owner has complete discretion in setting the bond requirements, including no bond required. Note that the cost of the bond is added to the contract, so the owner can save some money by not requiring a bond. They can take other precautions to protect themselves. Some examples:
- Requires a hold. These are funds that are held from the contractor and only released when the project is fully accepted.
- Lien releases may be required each month to demonstrate that vendors and subcontractors are properly paid
- Control of funds/Tripartite agreement: a payer is used to handle the funds of the contract
- Joint checks are issued to the contractor and paid under them, to ensure that the funds reach the intended parties.
- Physical site inspections to verify progress
In these articles we talk a lot 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 bail is often the first choice.