FAR Part 28

Bonds and Insurance

What is a Bond?

• Promise by a third party (the Surety) to fulfill the contractor’s responsibilities or compensate the Government in case of default.

• In Federal contracting performance and payment bonds are required by the Miller Act– Construction over 150K must have– Construction between 30K and 150K

may have

Common Bond Types

• Bid Bond – Surety will compensate Government in event contractor does not accept award.

• Performance Bond – Surety will either complete or cause the work to be completed if the contractor defaults

• Payment Bond – Surety will pat subcontractors or other valid claims should contractor fail to honor their debts.

Who Pays for Bonds?

• The cost of the bond is an allowable contract expense.

• The cost of a bond is typically quoted as a percent of the contract value

How are Bonds Secured?

• The surety (company or individual that issues bond) must be backed by acceptable security– Cash– Certificates of Deposit– Irrevocable Letter of Credit– Corporate Securities (if listed)– Government Bonds– Real Estate

When are Bonds Issued / Released• Bid Bond issued and accompanies

sealed bid for construction.• Performance and Payment bonds

issued prior to contract award for construction

• Value is a stated % of bid price for bid bond and full contract value for payment/performance.

Types of work that are bonded• Principle work is Construction

– Bid Bond– Performance Bond– Payment Bond

• Other types of contracts may also require bonds (e.g. Services)– Performance Bond

• Annual Performance Bonds

– Payment Bond

Surety’s Responsibility

• Begins with issuance of Bond• Requires them to fulfill bond requirements

including payment or performance– May perform or cause to be performed the

contractor’s work if contractor defaults– May compensate the bond holder for

expenses incurred in completing the work

• Liability absolved by a release of leins from CO at satisfactory complettion.

Insurance

• Contractors required to provide evidence of satisfactory insurance including:– Auto insurance for company vehicles and

their employees (200/500/20)– General Liability insurance (500K)

• Loss or damage to Government property

– Worker’s compensation insurance– Aircraft and passenger liability 200/500/200– Vessel Liability

Insurance Provider

• Typically contractor provides “Certificate of Insurance” attesting to the required coverage

• Certificate issued by Insurance Company

• Some companies self insure– Requires ACO approval