Overview
FAR 28.204 establishes the authority and procedures for contractors to provide alternative forms of security—such as U.S. government bonds, cash equivalents, or irrevocable letters of credit—in place of traditional corporate or individual surety bonds. It ensures that the government remains protected while offering contractors flexibility in how they satisfy bonding requirements for performance, payment, or bid guarantees.
Key Rules
- Principal Execution: The contractor must execute the bond forms as the principal, and a statement pledging the alternative security must be incorporated into the bond form.
- Asset Valuation: U.S. bonds or notes must be provided at an amount equal to their par value (not market value) to meet the penal sum of the bond and must include a power of attorney authorizing the government to sell them upon default.
- Cash Equivalents: Certified or cashier’s checks, bank drafts, money orders, or currency are acceptable but must be drawn to the order of the specific federal agency.
- Irrevocable Letter of Credit (ILC) Standards: ILCs must be issued by a federally insured, investment-grade financial institution; if an ILC exceeds $5 million and the issuer has limited letter of credit business, it must be confirmed by another acceptable institution.
- ILC Drawing Rights: The Contracting Officer (CO) must draw on the ILC immediately if the contractor fails to provide a replacement at least 30 days before the ILC expires, or if the issuing institution's credit rating falls below investment grade.
- Duration of Security: For contracts subject to the Bonds statute, security must generally be maintained until one year after final payment, or until the resolution of all claims and warranty periods.
- Flexibility and Substitution: Contractors are permitted to use a combination of different security types or substitute one form of acceptable security for another during the period of performance.
Practical Implications
- These alternatives provide a critical pathway for contractors who may lack the relationship or history with a surety company to obtain a standard corporate bond, allowing them to leverage their own liquid assets instead.
- Contracting Officers must perform ongoing administrative oversight, including verifying financial institution ratings on NRSRO websites and tracking expiration dates to ensure the government is not left unsecured if an ILC is not renewed.