Overview
FAR Subpart 28.2 prescribes the procedures and requirements for using sureties and other forms of security to protect the Government from financial loss. It outlines the standards for corporate and individual sureties, as well as the acceptable alternatives—such as cash, U.S. bonds, or Irrevocable Letters of Credit (ILC)—that contractors may provide in lieu of traditional bonds.
Key Rules
- Acceptable Security Types: Agencies must obtain security via corporate sureties, individual sureties, or authorized alternatives (e.g., U.S. bonds, certified checks, or ILCs).
- Corporate Surety Standards: For domestic contracts, corporate sureties must appear on Treasury Department Circular 570. If a bond exceeds the surety's underwriting limit, it must be coinsured or reinsured.
- Individual Surety Requirements: Individual sureties must pledge "eligible obligations" (acceptable collateral) as defined by the Treasury. The net adjusted value of these assets (market value minus margin) must equal or exceed the bond's penal amount.
- Irrevocable Letters of Credit (ILC): ILCs must be issued by investment-grade, federally insured financial institutions. They must be irrevocable and provide for automatic one-year extensions unless the issuer provides a 60-day notice of non-renewal.
- Duration of Security: For contracts subject to the Bonds statute, security interests are generally maintained for one year following final payment or until the completion of warranty periods and resolution of claims.
- Substitution and Release: Contractors may request to substitute one form of security for another, and Contracting Officers may allow partial releases of security based on substantial performance of the contract.
Responsibilities
- Contracting Officer (CO):
- Verifies corporate sureties against Treasury Circular 570.
- Coordinates with the Treasury’s collateral operations support team to validate individual surety assets and valuations.
- Determines the acceptability of an individual surety and notifies the offeror of the decision.
- Draws on an ILC immediately if a replacement is not provided 30 days before expiration.
- Reviews outstanding contracts and takes protective action if a surety’s authority is terminated.
- Department of the Treasury:
- Maintains the list of approved corporate sureties (Circular 570).
- Advises COs on the eligibility and valuation of assets pledged by individual sureties within three business days of notification.
- Contractor/Offeror:
- Provides adequate security and executes necessary forms (e.g., SF 28 for individual sureties, SF 273/274 for reinsurance).
- Ensures ILCs are renewed or replaced in a timely manner.
- Must furnish a credit rating for the financial institution when using an ILC.
- Agency Head (or Designee):
- Has the authority to exclude individual sureties for causes such as misrepresentation or failure to fulfill obligations.
Practical Implications
- Risk Management in Construction: Because construction projects frequently require performance and payment bonds, COs must vigilantly monitor Circular 570 supplements. If a contractor's surety is removed from the list, the CO must act quickly to require a replacement bond to ensure the Government remains protected.
- Liquidity Options for Small Businesses: The allowance of "Alternatives in Lieu of Sureties" (like ILCs or cashier’s checks) provides flexibility for contractors who may have the capital but struggle to secure a traditional bond through a corporate surety due to a lack of deep performance history.
- Strict Scrutiny of Individual Sureties: Following historical issues with "paper" assets, the FAR now requires direct Treasury verification of individual surety collateral. This adds a layer of administrative lead time (at least 3 business days) that contractors must account for during the bid process.
- The "30-Day Rule" for ILCs: This is a critical trigger point. If an ILC is set to expire and the contractor hasn't provided a replacement 30 days prior, the CO is mandated to "immediately draw" the funds. This prevents the Government from being left without security during a lapse in coverage.