Overview
FAR 49.404 outlines the procedures and conditions under which a surety may take over and complete a contract—primarily fixed-price construction—following a termination for default. It balances the surety's rights to contract funds with the Government's interest in ensuring the work is completed by qualified parties.
Key Rules
- Surety Preference: Contracting officers should generally permit a surety to complete the contract unless the proposed completion firms are incompetent or the proposal is not in the Government's best interest.
- Tripartite Agreements: The regulation encourages the use of a three-way agreement between the Government, the surety, and the defaulted contractor to resolve conflicting claims over unpaid prior earnings.
- Funding Limits: The Government’s obligation is limited to the unpaid balance of the contract price; payments to the surety cannot exceed the actual costs incurred in completing the work and discharging bond liabilities.
- Priority of Debts: Unpaid earnings from work performed before termination are subject to any debts the contractor owes the Government, though they may be used to reimburse the surety's completion costs (excluding payment bond obligations).
- Liquidated Damages: The surety is legally bound by the original contract terms regarding liquidated damages for completion delays, unless those delays are deemed excusable.
- Assignment Protection: If the contract proceeds were assigned to a financing institution, the surety cannot be paid from unpaid earnings without the written consent of the assignee.
Practical Implications
- This section provides a structured mechanism for the Government to resume work quickly after a default by leveraging the surety's financial motivation to minimize damages.
- It serves as a risk-mitigation tool for Contracting Officers, ensuring that the Government does not inadvertently waive its rights against a surety or pay out funds that are legally owed to third-party assignees or the Treasury.