Overview
FAR Part 28 prescribes the policies and procedures for obtaining financial protection against losses under government contracts. It specifically governs the use of bid guarantees, performance and payment bonds, and various insurance requirements to ensure the government is protected from contractor default and that subcontractors are compensated for their work.
Key Rules
- The Miller Act (40 U.S.C. Chapter 31): For construction contracts exceeding $150,000, both performance and payment bonds are mandatory unless specifically waived.
- Construction Thresholds ($35k - $150k): For construction projects within this range, the Contracting Officer must select two or more alternative payment protections (e.g., Irrevocable Letter of Credit, Tripartite Escrow Agreement).
- Bid Guarantees: Generally required only when performance and payment bonds are required. The standard amount is 20% of the bid price, capped at a maximum of $3 million.
- Non-Construction Bonds: Performance and payment bonds are generally discouraged for non-construction contracts unless the government's interest is at high risk (e.g., substantial progress payments or the use of significant government property).
- Consent of Surety: Required for contract modifications that involve new work outside the original scope or changes to the contract price exceeding 25% or $50,000.
- Responsiveness vs. Responsibility: Failure to provide a bid guarantee is a matter of responsiveness (results in immediate rejection), while issues with the authenticity of a Power of Attorney are handled as matters of responsibility after bid opening.
Responsibilities
- Contracting Officer (CO): Responsible for determining bond amounts, selecting appropriate payment protections for small-to-mid-sized construction, evaluating the acceptability of sureties, and ensuring all bonds are furnished before work begins.
- Contractor (Principal): Must provide valid bid guarantees, bonds, or insurance from acceptable sureties or financial institutions. They must also obtain additional bonding if contract prices increase.
- Attorney-in-Fact: Must provide evidence of authority (Power of Attorney) to bind the surety company to the government at the time of bid submission.
- Surety: Obligated to fulfill the contractor's performance or payment duties up to the "penal sum" if the contractor defaults.
- Chief of the Contracting Office: Holds the authority to waive bid guarantee requirements in specific circumstances (e.g., sole-source or emergency acquisitions).
Practical Implications
- Construction Barriers to Entry: Because bonding is mandatory for construction over $150,000, small or new firms must establish a relationship with a surety company and demonstrate financial stability to obtain the necessary bonding capacity to bid on federal work.
- Subcontractor Protections: Since subcontractors cannot place a lien on government-owned property, the payment bonds required by FAR Part 28 serve as the primary security for suppliers and lower-tier contractors to ensure they get paid.
- Administrative Diligence: Contractors must be meticulous with "Consent of Surety." If a contract value increases significantly through modifications without the surety’s formal consent, the government risks losing its financial protection, and the contractor may face delays in receiving a "Notice to Proceed."
- Flexibility for Non-Construction: For services and supplies, the government uses Part 28 selectively. This allows for risk mitigation in high-value asset removals or dismantling projects without imposing unnecessary bonding costs on standard commercial acquisitions.