This is the Bonding Company’s worst nightmare. In this article #160 of our Guarantee series, we’ll cover situations where you don’t need a performance or payment guarantee! Some projects are large and federal, some are private, and all are unrelated. here we are!
As a point of reference, you might expect federal, state, and municipal contracts to require a performance and payment (P&P) guarantee equal to the contract amount. usually they do. General contractors working for a private owner, such as building an office building or a residential project, may face the same requirements. This can apply to subcontractors as well.
Federal projects
This region includes all branches of the federal government. Examples: Army Corps of Engineers, General Services Administration, Department of Energy, etc. Their contracts are administered according to the rules of the Federal Acquisition Regulations (FAR).
FAR says no P&P bonds are required on contracts under $150,000.
For contracts of $150,000 or more that require a security, there are times when the bond requirement may be reduced to less than 100% or waived entirely. These include:
- External contracts
- emergency acquisitions
- Sole Source Projects
If the condition of the bond He is Mandatory, the FAR lists acceptable alternatives:
- US government bonds (investment)
- Certified check
- bank transfer
- money transfer
- currency
- Irrevocable letter of credit
Here’s another option: For contracts made in a foreign country, the government can accept a bond from a Warranty not included in the T-list. (Circular 570)
Government and municipal contracts
Bonding requirements may vary by state, but its flavor is generally similar to Federal.
private contracts
Anything goes. In private contracts, the owner has complete discretion to determine bonding requirements—including not needing a bond. Keep in mind that the cost of the bond is added to the contract, so the owner can save some money no require bond. They may take other precautions to protect themselves. some examples:
- require retention. This is money that is withheld from the contractor and only released when the project is fully accepted
- Foreclosure releases may be required each month to demonstrate that suppliers and subcontractors are being paid appropriately
- Money Control/Trilateral Agreement – A teller is employed to handle contract funds
- Joint checks are issued to the Contractor and the below payees – to ensure that funds reach the intended parties
- Physical site inspections to check progress
the nightmare
In these articles we talk a lot about how contractors obtain and administer surety bonds. But it’s interesting to note: A construction company can go on forever, doing state and federal projects—and never get a bond. it’s the truth!
If everyone did this, it would be the worst nightmare ever. But in fact, there are financial advantages to using P&P bonds, so bonding is usually the first choice.