Subcontractor Bonds - Allowable?

It is not uncommon for prime contractors to require bonds of their primary, key trade subcontractors. I saw that often in our negotiated contracts.

 As far as I know, there is nothing to prohibit such practices as long as they are reasonable for the risks involved. However I would question the necessity (reasonableness)  to require performance bonds of ALL subcontractors.

The( 8(a)) “prime” should justify why it is necessary to bond any or all(?) sub’s.

What is the effect of this on the overall contract price in terms of dollars and percentage?

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EDIT: My first assumption,  when a prime says it will bond ALL subs is that it is simply employing a way to charge additional overhead and profit. I don’t think that it is necessary because if a sub fails to complete a subcontract, the contractor does have some legal recourse for breach of contract. But if the the contractor wants to reduce their risk for delays or additional costs, etc., then the lower risk, combined with a higher cost to the owner, should be considered in the negotiation of profit. All of the various structured profit estimating algorithms consider risk factors. /END_EDIT

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 Since this is a risk reduction effort on the part of the prime contractor (the 8(A) “subcontractor”) , I would negotiate a lower profit percentage due to the reduction in risk. 

If they argue that there might be expenses in enforcing sub bonds, I’d argue that that is already included in the markup for G&A and allowance for profit in their subcontracts.

31.205-4 -- Bonding Costs.

(a) Bonding costs arise when the Government requires assurance against financial loss to itself or others by reason of the act or default of the contractor. They arise also in instances where the contractor requires similar assurance. Included are such bonds as bid, performance, payment, advance payment, infringement, and fidelity bonds.

(b) Costs of bonding required pursuant to the terms of the contract are allowable.

(c) Costs of bonding required by the contractor in the general conduct of its business are allowable to the extent that such bonding is in accordance with sound business practice and the rates and premiums are reasonable under the circumstances.

C Culham said:

31.205-4 -- Bonding Costs.

(a) Bonding costs arise when the Government requires assurance against financial loss to itself or others by reason of the act or default of the contractor. They arise also in instances where the contractor requires similar assurance. Included are such bonds as bid, performance, payment, advance payment, infringement, and fidelity bonds.

(b) Costs of bonding required pursuant to the terms of the contract are allowable.

(c) Costs of bonding required by the contractor in the general conduct of its business are allowable to the extent that such bonding is in accordance with sound business practice and the rates and premiums are reasonable under the circumstances.

lol, thanks.

joel hoffman said:

It is not uncommon for prime contractors to require bonds of at least their primary, key trade subcontractors. I saw that often in our negotiated contracts.

 As far as I know, there is nothing to prohibit such practices as long as they are reasonable for the risks involved. However I would question the need (reasonableness)  to require performance bonds of all subcontractors. The( 8(a)) “prime” should justify why it is necessary to bond any or all(?) sub’s.

What is the overall effect of this on the contract price in terms of percentage?

 Since this is a risk reduction effort on the part of the prime contractor (the 8(A) “subcontractor”) , I would negotiate a lower profit percentage due to the reduction in risk. 

If they argue that there might be expenses in enforcing sub bonds, I’d argue that that is already included in the markup for G&A and allowance for profit in their subcontracts.

Thanks for the assistance and input, Joel!

buonomma, why are you concerned with 52.232-5(g)?  That deals with progress payments not pricing a contract.  Further, nothing in that clause implicates the cost principles from FAR Part 31.

Retreadfed said:

buonomma, why are you concerned with 52.232-5(g)?  That deals with progress payments not pricing a contract.  Further, nothing in that clause implicates the cost principles from FAR Part 31.

Technically correct.

The paragraph-5(g) simply allows the contractor to request reimbursement for the bond premiums that it had to pay to obtain performance and payment bonds so that it may commence work.  Otherwise, it would have to amortize the premium as it earns progress payments. 

However,  buonamma is correct that the contractor can’t request reimbursement for subcontractor bond costs under paragraph 5(g). Those costs must be liquidated/amortized/recovered/spread over progress payments for the work performed by those applicable subs.

joel hoffman said:

It is not uncommon for prime contractors to require bonds of their primary, key trade subcontractors. I saw that often in our negotiated contracts.

 As far as I know, there is nothing to prohibit such practices as long as they are reasonable for the risks involved. However I would question the necessity (reasonableness)  to require performance bonds of ALL subcontractors.

The( 8(a)) “prime” should justify why it is necessary to bond any or all(?) sub’s.

What is the effect of this on the overall contract price in terms of dollars and percentage?

——————————————

EDIT: My first assumption,  when a prime says it will bond ALL subs is that it is simply employing a way to charge additional overhead and profit. I don’t think that it is necessary because if a sub fails to complete a subcontract, the contractor does have some legal recourse for breach of contract. But if the the contractor wants to reduce their risk for delays or additional costs, etc., then the lower risk, combined with a higher cost to the owner, should be considered in the negotiation of profit. All of the various structured  profit estimating algorithms consider risk factors. /END_EDIT

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 Since this is a risk reduction effort on the part of the prime contractor (the 8(A) “subcontractor”) , I would negotiate a lower profit percentage due to the reduction in risk. 

If they argue that there might be expenses in enforcing sub bonds, I’d argue that that is already included in the markup for G&A and allowance for profit in their subcontracts.

The above is an edit of my original post above.

joel hoffman said:

However,  buonamma is correct that the contractor can’t request reimbursement for subcontractor bond costs under paragraph 5(g). Those costs must be liquidated/amortized/recovered/spread over progress payments for the work performed by those applicable subs.

I am not so sure that this statement is correct.  

Following is reference to a GAO decision  that provides a historic view of the wording now used in 52.232-5(g).  In this historic view bonding costs discussed were that of prime and subs.   The GSBCA case also referenced below discusses within its context bond costs for both the prime and subcontractors where it states "bond premiums included in appellant's initial and revised proposals were estimates of bond premiums to be incurred by appellant and its subcontractors".

Noting these decisions and reading the language of 52.232-5 closely I see nothing that would disallow the payment of subcontractor bonding costs if in submitting its request for payment the prime demonstrates that subs have in fact provided bonding and invoiced the prime for same. 

https://www.gao.gov/assets/420/410197.pdf

https://www.gsbca.gsa.gov/appeals/w1668929.txt

I disagree with your conclusion, Carl. 

The 1977 GAO Decision was an opinion as to whether it was legal to reimburse a contractor for actual price of premiums for bonds that are  “required by law” prior to any progress earnings. 

The GAO stated that it wouldn’t object to such reimbursements that would then be liquidated * as progress payments were earned, if a contract provided for such reimbursements. It would require revising the then applicable ASPR progress payments clause. Note that the ASPR clause was then seven years prior to the 1984 initial FAR clause. 

The 2015 GSBCA Decision concerned an appeal of a KO Decision where the Government unilaterally reduced the contract price for alleged “defective pricing”. The contractor submitted its request for reimbursement for its actual bond premiums, which were less than the amounts included in its proposals for two contracts. 

The Decision did not state that the contractor submitted request for reimbursement of payment of subcontractor bond premiums.

The Board stated that the proposed premium was an estimate and that the parties did not agree  on the proposed amount during negotiations only on the overall contract amount. The estimated costs were not “defective cost or pricing data”.  

The paragraph “g” in the payments clause doesn’t limit the contract amount for bonds, which may also include overhead and profit, absent specific contract language  that would limit the contract amount to the actual bond premiums. It only covers reimbursement separately, up front for paid bond premiums. 

I have seen CLIN schedules that have separate line items for bonds limiting the allowable amount to actual bond premiums or the line item amount, whichever was less.

However, for competitively awarded contracts where there is no cost breakdown provided, that is a false assumption. The contractor can include overhead and profit or cushion in other line items.  I would do that. 

The GAO Decision also used the justification that bonds required by law served a public purpose and provided value and protection to the government, thus could be considered to be harmonius with the law prohibiting progress payments prior to any progress, provided that the contract language allows such reimbursements. 

Subcontract bonds are NOT required by law and, in my opinion, provide NO added value or protection to the government. They are solely in the interest of the contractor who requires them. The contract language DOES NOT authorize reimbursement of subcontractor bond premiums under -5(g). They have to be included in the normal progress payments. 

The 1977 GAO Decision notes that non-government agencies tend to consider bond payments part of “mobilization costs”, which were often included as separate bid items. For our contracts, there has to be a Mobilization Line Item in order to pay those types of costs and the contract describes types of costs that would be covered in such a line item. 

*”LIQUIDATE”:  The amount paid up front for bond premiums, if not included in a separate line item, are “liquidated”, by backing it out as progress proceeds on the contract. Example: if a monthly progress payment indicates that overall progress is 10%, you show 90% of the original bond payment and the other 10% will be reflected in the CLINs comprising the 10% progress. Similarly, 80%/20%, etc. etc., until you get to 100%/0%.

This would be an administrative nightmare if you had to do this for each subcontract bond as progress is made on that work. 

Stored materials are similar. , You blackout/reduce or (liquidate) the cumulative stored materials as they are incorporated into the work as progress. 

at any rate, I never saw subcontractor bonds reimbursed separately from progress and our policy didn’t recognize such reimbursement.

On ‎9‎/‎14‎/‎2019 at 4:21 PM, joel hoffman said:

I disagree with your conclusion, Carl

You have not provided any reference to support your disagreement. 

Specifically in the referenced Forum thread below an OP notes that an agency did reimburse for subcontractor premiums.   With regard to the thread also note why a prime was requiring subcontractor bonding...because the bonding company of the prime demanded it.   So while you believe there is no value added to subcontractor bonds industry believes there is.

To the rest of your read of the decisions I provided I believe you are missing a very important part of the 1977 decision, that being that reimbursement for total bond premiums actually incurred by a prime is not considered an advance payment when a contract clause provides for such reimbursement.  

Applying the ideal that reimbursement is not an advance payment should a primes subcontract require a subcontractor to provide bonds and the primes subcontract provides that subcontractor bonds will be reimbursed the same ideal applies, reimbursement for all bond premiums is not an advance payment.  I would add here that FAR 31.205-4 provides that bonding costs by subs is considered in the same context as bond premiums for primes when such bonding is sound business practice (required by a primes bonding company!).     A prime if billed by the sub for its bond premium could in turn request the Government for reimbursement such costs as an actual cost incurred in performance of the work just as the 1977 decision depicts.  Yes I would agree that your thoughts on prorating could also occur but the government has no privity of contract with the sub to demand they price a certain way it is a contractual matter between the prime and sub.  Again I note that the exact wording of 52.232-5(g) provides for reimbursement of bond premiums paid by the contractor and the contractor, if they have paid the premium in full for bond premiums to its subs, and as by certification in paragraph (c) of 52.232-5 has so certified, the prime contractor has incurred a cost that they can bill in full for.

Turning next to the GSBCA case you  overlook the point that the decision is with regard to bond premiums incurred by appellant and its subcontractors and specifically deals with paragraph (g) of the 52.232.-5 that such costs, again the incurred costs of bonds for the prime and its subcontractors, were billed for prior to the first contract progress payment and conclusion of the GSBCA was that the billing should have been paid without adjustment.

As always I am open to changing my mind when a substantive reference is provided that says only the primes own bonding costs can be reimbursed.

POSTSCRIPT - I find your argument interesting specific to this thread because factually the OP has provided that the contract in question is an 8(a) and therefore pursuant to the FAR  SBA is the prime and the 8(a) firm is a subcontractor so in applying your position to the instant contract the subcontractor (the 8(a) firm)  could not be reimbursed for the bond premiums.   But by history they are and the reason why is because paragraph (g) of 52.232-5 allows it!!!!!!!

Carl out!

C Culham said:

You have not provided any reference to support your disagreement. 

Specifically in the referenced Forum thread below an OP notes that an agency did reimburse for subcontractor premiums.   With regard to the thread also note why a prime was requiring subcontractor bonding...because the bonding company of the prime demanded it.   So while you believe there is no value added to subcontractor bonds industry believes there is.

To the rest of your read of the decisions I provided I believe you are missing a very important part of the 1977 decision, that being that reimbursement for total bond premiums actually incurred by a prime is not considered an advance payment when a contract clause provides for such reimbursement.  

Applying the ideal that reimbursement is not an advance payment should a primes subcontract require a subcontractor to provide bonds and the primes subcontract provides that subcontractor bonds will be reimbursed the same ideal applies, reimbursement for all bond premiums is not an advance payment.  I would add here that FAR 31.205-4 provides that bonding costs by subs is considered in the same context as bond premiums for primes when such bonding is sound business practice (required by a primes bonding company!).     A prime if billed by the sub for its bond premium could in turn request the Government for reimbursement such costs as an actual cost incurred in performance of the work just as the 1977 decision depicts.  Yes I would agree that your thoughts on prorating could also occur but the government has no privity of contract with the sub to demand they price a certain way it is a contractual matter between the prime and sub.  Again I note that the exact wording of 52.232-5(g) provides for reimbursement of bond premiums paid by the contractor and the contractor, if they have paid the premium in full for bond premiums to its subs, and as by certification in paragraph (c) of 52.232-5 has so certified, the prime contractor has incurred a cost that they can bill in full for.

Turning next to the GSBCA case you  overlook the point that the decision is with regard to bond premiums incurred by appellant and its subcontractors and specifically deals with paragraph (g) of the 52.232.-5 that such costs, again the incurred costs of bonds for the prime and its subcontractors, were billed for prior to the first contract progress payment and conclusion of the GSBCA was that the billing should have been paid without adjustment.

As always I am open to changing my mind when a substantive reference is provided that says only the primes own bonding costs can be reimbursed.

POSTSCRIPT - I find your argument interesting specific to this thread because factually the OP has provided that the contract in question is an 8(a) and therefore pursuant to the FAR  SBA is the prime and the 8(a) firm is a subcontractor so in applying your position to the instant contract the subcontractor (the 8(a) firm)  could not be reimbursed for the bond premiums.   But by history they are and the reason why is because paragraph (g) of 52.232-5 allows it!!!!!!!

Carl out!

Why should the Government be responsible for paying this premium all because their bonding agency demanded it?  This is not standard practice nor should it become one.  Maybe in certain circumstances in would be advantageous for one/some subcontractors to be bonded, but certainly not in my specific situation.  Just because it may be the surety's policy to require bonds of the subs does not make it a "sound business practice".  It provides no additional advantages or assurances for the Government, rather only to the surety and maybe the Contractor, so why should we be responsible for reimbursing them (with markups on top, at that) for something we do not require?

Regarding the SBA as the prime contractor, this is not the case, and I cannot remember the last time it was.  The Government negotiates and issues awards directly with the 8(a) Contractor.

buonomma,

You are at the negotiating table -- if you come to agreement on the bottom-line firm-fixed price (one way or the other), that's good.  If you don't come to agreement, then end the negotiations and ask the SBA for another source with whom to commence new negotiations.

But your focus should be on the bottom-line price, not the individual cost elements.  See FAR 15.405(a).

buonomma said:

Why should the Government be responsible for paying this premium all because their bonding agency demanded it?  This is not standard practice nor should it become one.  Maybe in certain circumstances in would be advantageous for one/some subcontractors to be bonded, but certainly not in my specific situation.  Just because it may be the surety's policy to require bonds of the subs does not make it a "sound business practice".  It provides no additional advantages or assurances for the Government, rather only to the surety and maybe the Contractor, so why should we be responsible for reimbursing them (with markups on top, at that) for something we do not require?

Regarding the SBA as the prime contractor, this is not the case, and I cannot remember the last time it was.  The Government negotiates and issues awards directly with the 8(a) Contractor.

Argue as you may because primes do require bonding by subs and you can pay the premium  that is why.    I believe market research especially utilizing the internet will provide adequate substantiation that requiring  bonding by subcontractors is industry practice.   You will find that many firms have a policy that for subcontract work over a stipulated dollar amount bonding is needed.   As I also pointed out it may very well be the requirement of a bonding company that a prime secure bonding of subs before the bonding company will provide the prime with bonds.  Likewise I refer back to my post of FAR 31.205-4 and the GSBCA decision that provides further substantiation that bonding by subs is allowable and done. 

I would add the reminder of FAR part 31 allowably of a cost is determined by the following which must be considered in whole -  A cost is allowable only when the cost complies with all of the following requirements: (1) Reasonableness. (2) Allocability. (3) Standards promulgated by the CAS Board, if applicable; otherwise, generally accepted accounting principles and practices appropriate to the circumstances. (4) Terms of the contract.  As ji points out if you think it does not meet this standard then move on but your argument so far has not addressed the standards to reject the costs for subcontractor bonding you are encountering as unallowable you just don't like the idea of it. 

Regarding SBA, have you read FAR subpart 19.8 in detail?    If not I suggest you do.   Most agencies now use a tripartite contract format for 8(a) awards so my quick reference for you to refer to is 52.219-17 which states in the very beginning - "By execution of a contract, the Small Business Administration (SBA) agrees to the following:   (1) To furnish the supplies or services set forth in the contract according to the specifications and the terms and conditions by subcontracting with the Offeror who has been determined an eligible concern pursuant to the provisions of section 8(a) of the Small Business Act, as amended (15 U.S.C. 637(a))."

buonomma said:

It provides no additional advantages or assurances for the Government, rather only to the surety and maybe the Contractor, so why should we be responsible for reimbursing them (with markups on top, at that) for something we do not require?

Take a read here.   I agree it is not spot on but in this case it seems the CBCA thought markup by a prime on subs bonding costs was appropriate.

https://www.cbca.gov/files/decisions/2011/SHERIDAN_11-16-11_1539__RELIABLE_CONTRACTING_GROUP_LLC_508.pdf

ji20874 said:

But your focus should be on the bottom-line price, not the individual cost elements.  See FAR 15.405(a).

To add.....as this is an 8(a) the standard on bottom-line price is "fair market price" so one should also consider FAR 19.001, 19.806 and 19.807

The 1977 GSA Decision said that it isn’t an advance payment - if the contract payments clause provides for it. 

On 9/16/2019 at 8:13 AM, C Culham said:

To the rest of your read of the decisions I provided I believe you are missing a very important part of the 1977 decision, that being that reimbursement for total bond premiums actually incurred by a prime is not considered an advance payment when a contract clause provides for such reimbursement.

I’m saying again that the GAO Decision said that in order to make advance payment for the contractor’s bond that is required by law,  the then versions of ASPR and FPR payments clauses had to be updated to allow it. The wording in the current clause doesn’t state that reimbursement to contractor’s reimbursements to subs for their bonds (not required by law) were included. 

From the 1977 GSA Decision (B-189402):

“Digest: Reimbursements to Government contractors of the total amount of paid performance and payment bond premiums in the first progress payment can be authorized by amending the relevant ,ASPR and FPR clauses to specifically so provide. Such reimbursements are not payments for future performance but are reimbursements to the contractor for his costs in providing a surety satisfactory to the Government as required by law, and therefore. are not prohibited by 31 U.S.C. I 529. Prior Comptroller General decisions clarified.”

Subcontractor bonds are not required by law. The Miller Act requires the contractor to provide performance and payment Bonds for the government. It does not require the contractor to provide bonds from a contractor’s sub’s. Those bonds don’t provide any protection to the government. The contractor is responsible to perform the contract and IT’S payment bond covers payments to subs, suppliers and to the total labor force. The secondary bonds attempt to pass risks for certain subs from the contractor and it’s Surety through other bonds to the subs and their sureties.

The contract payments 52.232-5 clause at (g) doesn’t provide for reimbursement of a contractor payment to subcontractors for bond premiums paid by subcontractors.  

And they aren’t coinsurance or reinsurance. Those are forms of insurance. Bonds are NOT insurance. A contractor must indemnify the surety for any costs incurred under the bonds for performance or payments . 

The GSBCA case did NOT say that the government paid the prime contractor for subcontractor bonds in a progress payment. The case concerned the amount of bond premiums. When the prime invoiced for payment, the government noticed that the contractor’s actual premium was less than the contractor proposed. It was a defective pricing issue. It involved claims on two contracts. 

And - the prior WIFCON thread that you referred to didn’t say that it’s ok to make a progress payment to the contractor for bond premiums paid by subs to the bonding company. 

Im not arguing that a contractor requiring  subcontractor bond is unallowable cost. I’m only discussing separate reimbursement to the contractor in advance of earned progress. 

Carl, you are taking words in your references out of context to justify your position. And your reference to the 8(A) firm as a subcontractor is another out of context grasp.

Regarding the bolded wording below from the Digest of the 1977 GAO Decision:

“Reimbursements to Government contractors of the total amount of paid performance and payment bond premiums in the first progress payment can be authorized by amending the relevant ,ASPR and FPR clauses to specifically so provide.”

One must understand the context of “total amount” of paid performance and payment bond premiums. At the time, the applicable ASPR Payments clause (I haven’t seen the FPR clause) did not have a provision for reimbursement of bond premiums separately from construction progress. The GAO had earlier reservations that to do so would violate statutes that prohibited advanced payments. So, the contractor had to amortize “the total amount of the paid premiums” over the course of construction as progress accrued.

This was a relook of the earlier decisions. 

The digest that I quoted above clearly described reimbursements of payments  for bonds that are required by law (the Miller Act). It went on to say that such payments would not violate the provisions of 31 USC 1529. To authorize the “total” vs. liquidated  payment, the government would need to amend the relevant Armed Services Procurement Regulations and Federal Procurement Regulations clauses. 

The clauses were updated and the later FAR clause used similar language. 

P.S., this is a FFP Construction Progress Payments issue. For cost reimbursement type construction contracts, I believe that reimbursement to subcontractors for allowable costs, including bond premiums can be and are made, independent of progress on the contract work. Of course, that would depend upon the terms of the subcontract 

For cost reimbursement contracts and CP subcontracts, progress and schedule are evaluated using earned value management systems.

Note that sophisticated construction contractors manage both their FFP and CP contracts using earned value techniques, regardless of whether or not the government requires EVMS.

For FP subcontracts they would normally measure progress for sub payments.

.

joel hoffman said:

One must understand the context of “total amount” of paid performance and payment bond premiums.

Joel ,

Exactly.  

The matter was brought to the Comp Gen by the then National Research Council, Building Research Advisory Board, Standing Committee on Procurement Policy (BRAB Committee) which was made of up Federal entities involved in construction based on a conclusion and recommendation of the BRAB that reimbursement for premiums paid would be a cost savings to the Government by contractors reducing bid amounts due as it would relieve them of the cost of money (my term) for having to pro rata the premium costs over a contract period.  The BRAB Committee recommendation was supported by the National Association of Surety Bond Producers and the Associated General Contractors of America who by statement provided that "'The general contractor, moreover, has an additional expense in the bids he receives from his subcontractors unless he pays them the full bond premiums for their subcontractor bonds running in his favor as the cost of their expense for borrowing to pay bond premium will be included in their bids to him and passed on by him in his bid to the owner." 

It is this context on which wording for clauses regarding reimbursement of bond premiums became drafted and now resides in the current FAR.   It is also in this context that the decision you want to argue matters less than the current clause that is placed in contracts which does not, let me repeat does not, provide wording that limits payment of premium amounts to that of the prime but rather by its wording allows for reimbursement   "for the amount of premiums paid for performance and payment bonds (including coinsurance and reinsurance agreements, when applicable) after the Contractor has furnished evidence of full payment to the surety." 

Of note the preceding quote read carefully provides a contractor can be reimbursed for coinsurance and reinsurance agreements.  So in your argument a contractor can not be reimbursed for bond premiums (adequately supported and proven) but can be reimbursed for a reinsurance agreement.  Subcontractor bonds transfer risk from the prime to the sub, reinsurance agreements do the same.

All said we disagree.  I put my conclusion specifically on the current clause and the facts that I have found to date that bond premiums of subcontractors are allowable (FAR 31.205-4) and as they are allowable can be reimbursed through invoice to the prime who in turn invoices the Government and the Government reimburses per the clause.  Here I note noting in the FAR limits the allowable cost of a subcontractor bond to a pro rata payment methodology.    These conclusions are based on my limited ability of research  where I have reviewed BCA cases and other documents and can find no definitive answer, and noting that Federal entities do reimburse for  bond premiums inclusive of those premiums of a sub in the manner I have noted in this paragraph that doing so is appropriate.

I therefore hereby agree to disagree until such time you can provide a definitive reference that says sub bond premiums, if billed and substantiated to the prime, can not be reimbursed to the prime.

And I therefore hereby agree to disagree until such time you can provide a definitive reference that says sub bond premiums, if billed and substantiated to the prime, can be directly reimbursed to the prime  under paragraph (g) of 52.232-5.

The GAO Decision filed at B189402 dated October 12, 1977 is not such a reference.   The clear description in the Digest is for bonds required by law. 

The Decision said that contractors could be reimbursed in the first progress payment for the total (full) amount of the premium of bonds required by law - IF the ASPR and FPR payment clauses were amended to allow that. This would be in lieu of "bond premiums [being] recoverable (Indirectly) through progress payments only on the basis, and to the extent, of actual contract performance rendered which qualified under the progress payment clause".

Sub Bonds are not required by law.

I found the FAR 1983 version of the Payments Clause at 52.232-5, with the same language at paragraph (e). I had a set of the ASPR but cant locate it in my files. I haven't found a copy that I can download or view of the 1976 to 1978 edition of the ASPR..

Regarding paragraph (g) of the current FAR clause, performance and payment bonds are not coinsurance or reinsurance.

The Contractor must furnish evidence of full payment to the surety for the bonds. Note that "surety" is singular, not plural - not multiple sureties.

The contractor doesn't pay the surety.  It wont be able to provide evidence of its payment to the surety. If the clause intended to provide for reimbursement of prime payment to sub(s) for their bonds, it would also require evidence of the contractor's reimbursement to the sub(s). The government isn't going to "reimburse the Contractor for the amount of premiums paid for performance and payment bonds" if it didn't pay the various sureties for those bonds or didn't reimburse.those sub(s) who did pay for the bonds. 

The clause doesn’t use the word “total”.

So, here is what I am understanding--

1. In the old days, before 1977, the prevailing thought was that bond premiums were not reimbursable up front because of a fear of advance payment, so all bond premiums had to be pro rata reimbursed over the life of the contract.
2. In 1977, the GSBCA decided in a particular cited case that this contractor could be reimbursed for bond premiums up front, and that such reimbursement was not an advance payment because the bond premium was required by law.
3. The sole reason for the mention of "required by law" in the decision was to make the argument that the reimbursement was no longer to be seen as an advance payment.
4. The 1977 case only addressed reimbursement of a prime contractor's bonds, because those were the facts of that case. 
5. All of the above was before the FAR existed.
6. FAR 52.252-5(g) allows for reimbursement up front for performance and payment bond premiums.
7. FAR 52.232-5(g) does not expressly limit its applicability to bond premiums incurred by the prime contractor.  
8. Joel thinks subcontractor bond premiums may not be reimbursed in a fixed-price construction contract; Carl thinks they may be.

ji20874 said:

So, here is what I am understanding--

1. In the old days, before 1977, the prevailing thought was that bond premiums were not reimbursable up front because of a fear of advance payment, so all bond premiums had to be pro rata reimbursed over the life of the contract.
2. In 1977, the GSBCA decided in a particular cited case that this contractor could be reimbursed for bond premiums up front, and that such reimbursement was not an advance payment because the bond premium was required by law.
3. The sole reason for the mention of "required by law" in the decision was to make the argument that the reimbursement was no longer to be seen as an advance payment.
4. The 1977 case only addressed reimbursement of a prime contractor's bonds, because those were the facts of that case. 
5. All of the above was before the FAR existed.
6. FAR 52.252-5(g) allows for reimbursement up front for performance and payment bond premiums.
7. FAR 52.232-5(g) does not expressly limit its applicability to bond premiums incurred by the prime contractor.  
8. Joel thinks subcontractor bond premiums may not be reimbursed in a fixed-price construction contract; Carl thinks they may be.

ji, your number 2, above, is incorrect.  It was a 2005 GSBCA Decision* and a recent FAR Payments clause would have been in the contract. The Case didn't indicate whether or not subcontractor bond premiums were included in the up-front payment. Advanced payment wasn't an issue and I didn't read that the GSBCA decided "such reimbursement was not an advance payment because the bond premium was required by law"

That case involved appeals on two separate contracts for contracting officer final decisions with regard to unilateral deductive modifications to two contracts with the General Services Administration (GSA).  They were defective pricing issues. The amount of the actual bond premiums for the two contracts were less than the Contractor, PANGEA, Inc., proposed during negotiations.

*GSBCA 16688, 16689 PANGEA, INC., Appellant, v. GENERAL SERVICES ADMINISTRATION, Respondent.  https://www.gsbca.gsa.gov/appeals/w1668929.txt

Carl and I disagree about whether or not FAR 52.232-5(g) limits its applicability to bond premiums incurred by the prime contractor.  Actually, the clause does allow reinsurance or coinsurance agreements, when applicable. However, subcontract bonds are not reinsurance or coinsurance as far as I can determine. They don't offer any share of performance or payment bonding cost or responsibility to the oblige (the government).

I have not been able to find how the FPR and ASPR implemented the action of adding the upfront bond payment authorization. I don't know if there is any record or explanation of the subsequent "amendments" to the ASPR and FPR clauses. The GAO decision merely modified its earlier prohibition of making upfront premium reimbursements for those bonds that are REQUIRED BY LAW.

ji20874 said:

So, here is what I am understanding--

Not quite from my point of view....here is how I see it.

1. In the old days, before 1977, the prevailing thought was that bond premiums were not reimbursable up front because of a fear of advance payment, so all bond premiums had to be pro rata reimbursed over the life of the contract.

2. In 1977 the BRAB Committee study recommended that bond premiums be reimbursed up front as a cost saving measure in government contract bids.  Their recommendation was based on the BRAB study that found that bond premiums for both primes and subs if paid for on a reimbursable basis would result in the cost savings in bids to the government.

3. In 1977, the BRAB requested GAO provide guidance on reimbursed  bond premiums up front, as it was feared that such reimbursement might be a advance payment based on previous GAO decisions and interpretation of 31 U.S.C. 529. 

4. In the 1977 decision GAO is absent the "required by law" wording.  The GAO actually opined in the last paragraph  of the decision "that 31 US.C. 529 does not preclude Government from providing in a contract for full reimbursement of  bond premiums (where otherwise  appropriate) upon presentation of receipted invoices. While not necessarily the only alternative, this could be accomplished by amending the standard progress payment clauses…"

5. The 1977 case  addressed reimbursement of a prime contractor's and subcontractors bonds, because the facts presented by the BRAB study addressed both prime and sub bond costs and the same was noted in quotes by non-government entities in the case. 

6. All of the above was before the FAR existed.

7. The FAR came into existence in 1983.

8. At existence FAR 31.204-5 provided and still provides that **"**Bonding costs arise when the Government requires assurance against financial loss to itself or others by reason of the act or default of the contractor. They arise also in instances where the contractor requires similar assurance" and that such costs are allowable inclusive of "costs of bonding required by the contractor in the general conduct of its business are allowable to the extent that such bonding is in accordance with sound business practice and the rates and premiums are reasonable under the circumstances.

9. At existence FAR 52.252-5 at (e) allowed for reimbursement up front for premiums paid for performance and payment bonds.

10. FAR 52.232-5(e) and now at (g) does not expressly limit its applicability to bond premiums incurred by the prime contractor.  

11. Joel thinks subcontractor bond premiums may not be reimbursed in a fixed-price construction contract; Carl thinks they may be.

References other than the GAO decision which has already been provided -

https://www.govinfo.gov/content/pkg/FR-1983-09-19/pdf/FR-1983-09-19.pdf#page=1

https://books.google.com/books?id=-JMrAAAAYAAJ&pg=PA21&lpg=PA21&dq=B-112376&source=bl&ots=_jdt8lGjA6&sig=ACfU3U1mYCpQsMVn6C3Yp9VQiAZu3-ag_g&hl=en&sa=X&ved=2ahUKEwiZ2ZqRidnkAhXB854KHe56BqwQ6AEwAXoECAkQAQ#v=onepage&q=B-112376&f=false

C Culham said:

In the 1977 decision GAO is absent the "required by law" wording.

The Digest of the GAO Decision puts the opinion in the last paragraph into proper context. The Digest cannot be ignored It must be read as part of the Decision, when read in whole. It does not support the opinion that subcontract bond premiums can be reimbursed up front.

On 9/16/2019 at 3:38 PM, joel hoffman said:

From the 1977 GSA Decision (B-189402):

“Digest: Reimbursements to Government contractors of the total amount of paid performance and payment bond premiums in the first progress payment can be authorized by amending the relevant ,ASPR and FPR clauses to specifically so provide. Such reimbursements are not payments for future performance but are reimbursements to the contractor for his costs in providing a surety satisfactory to the Government as required by law, and therefore. are not prohibited by 31 U.S.C. I 529. Prior Comptroller General decisions clarified.”

And the term "total amount of paid performance and payment bond premiums in the first progress payment"  is in contrast with the then required method limiting the contractor recovering such costs as progress occurred. It doesn't state that "total premiums of prime and sub bonds" can be reimbursed in the first progress payment. In many cases, the prime contractor hasn't even bought out or finalized some of its subcontracts at the time that it invoices for reimbursement of the bond premium. Our contractors commonly sent the first progress payment request with invoice and bond premium receipts in within the first billing period after NTP was issued.

joel hoffman said:

The Digest of the GAO Decision puts the opinion in the last paragraph into proper context.

I am done with the back and forth on the 1977 decision.  I am waiting instead for your definitive reference that subcontractor bonding which is an allowable cost when appropriately substantiated and billed to the prime (contractor) and in turn billed by the prime (contractor) to the government  is not reimbursable in the first contract progress payment.

Thank you.

joel hoffman said:

And the term "total amount of paid performance and payment bond premiums in the first progress payment"  is in contrast with the then required method limiting the contractor recovering such costs as progress occurred. It doesn't state that "total premiums of prime and sub bonds" can be reimbursed in the first progress payment. In many cases, the prime contractor hasn't even bought out or finalized some of its subcontracts at the time that it invoices for reimbursement of the bond premium. Our contractors commonly sent the first progress payment request with invoice and bond premium receipts in within the first billing period after NTP was issued.

Seriously Joel get off the 1977 decision.   The actual FAR clause in a contract is what counts!   And as such it says nothing about first progress payment.  52.232-5(g) says you can reimburse them and that is it.

Just now, C Culham said:

I am done with the back and forth on the 1977 decision.  I am waiting instead for your definitive reference that subcontractor bonding which is an allowable cost when appropriately substantiated and billed to the prime (contractor) and in turn billed by the prime (contractor) to the government  is not reimbursable in the first contract progress payment.

Thank you.

You are welcome. I already did but you apparently don't believe that the Digest is part of the decision or you think that subcontractor bonds are required by law.

Definition from Merriam Webster:  

Quote

digest

noun

di·gest | \ ˈdī-ˌjest \

Definition of digest

 (Entry 1 of 2)

1 : a summation or condensation of a body of information: such as

a : a systematic compilation of legal rules, statutes, or decisions

C Culham said:

Seriously Joel get off the 1977 decision.   The actual FAR clause in a contract is what counts!   And as such it says nothing about first progress payment.  52.232-5(g) says you can reimburse them and that is it.

Come on now, Carl.  What authorized your interpretation of the "actual FAR clause"? The wording is essentially the same as it was in 1983.

Did the GAO update its Decision? Have you found more updated authorization?

Up to now, you have hung your hat on the 1977 GAO Decision.

If I were again in a construction setting, in my contracting officer practice I might be willing to reimburse subcontractor bond premiums under FAR 52.232-5(g) if subcontractor bonds were required--

1. by the prime contract; or 
2. by the prime contractor's surety as common practice in the industry (in contrast to elective self-protection choices made by the prime contractor).

On 9/14/2019 at 9:03 AM, C Culham said:

I am not so sure that this statement is correct.  

Following is reference to a GAO decision  that provides a historic view of the wording now used in 52.232-5(g).  In this historic view bonding costs discussed were that of prime and subs.   The GSBCA case also referenced below discusses within its context bond costs for both the prime and subcontractors where it states "bond premiums included in appellant's initial and revised proposals were estimates of bond premiums to be incurred by appellant and its subcontractors".

Noting these decisions and reading the language of 52.232-5 closely I see nothing that would disallow the payment of subcontractor bonding costs if in submitting its request for payment the prime demonstrates that subs have in fact provided bonding and invoiced the prime for same. 

https://www.gao.gov/assets/420/410197.pdf

https://www.gsbca.gsa.gov/appeals/w1668929.txt

I believe that ya misinterpreted or read something into the 2005 GSBCA case and you ignored the Digest, (summation or condensation) of the 1977 GAO Decision.

While the types of bonds were described in the negotiations for the contract at issue in the GSBCA decision, the actual reimbursement didn't describe what it was for only that it was less than the proposed bond premium for each contract (thus the reference to "premiums").  There were two contracts and two government reductions of cost for alleged defective pricing. They weren't broken out in detail.

Gotta move on to important things now - walking my dog and finishing up a church playground project.

The 2005 GSBCA is not persuasive to me.  Footnote 1 on page one says that the case has no value as precedent, because it was decided in the summary process.

I appreciate this discussion.  It is okay for different practitioners to practice differently.  If a contracting officer errs, there are remedy procedures.

I don't think anyone has mentioned one thing that is possibly relevant to this discussion.  That is the definition of "Bond" in the FAR (at FAR 28.001).  It covers only bonds "executed by a bidder or contractor" and "a second party (the 'surety' or 'sureties') . . .." (Emphasis added.)  Therefore, bonds executed by a subcontractor would not be "bonds" for FAR purposes, and presumably not covered by FAR 52.232-5(g).

ALAL,

Interesting observation.  So, in your contracting officer practice, would you refuse to reimburse a prime contractor for subcontractor performance and payment bond premiums under FAR 52.232-5(g) based on that argument?

ALAL said:

I don't think anyone has mentioned one thing that is possibly relevant to this discussion.  That is the definition of "Bond" in the FAR (at FAR 28.001).  It covers only bonds "executed by a bidder or contractor" and "a second party (the 'surety' or 'sureties') . . .." (Emphasis added.)  Therefore, bonds executed by a subcontractor would not be "bonds" for FAR purposes, and presumably not covered by FAR 52.232-5(g).

Good observation, AL AL.

Well, it is true that the subcontractor performance and/or payment bonds, if required by the contractor and/or its surety,  do not cite the government as the obligee. The Contractor is the obligee or party directly benefitting from the subcontract bond. They are a vehicle for the contractor and its surety to require subcontractors to indemnify said contractor and its surety from losses due to covered subcontractor actions or omissions.

In addition, those private Bonds are not issued on SF25 and SF25-A, which are mandatory for the contractually required performance and payment bonds and which name the government as the obligee..

They are not necessarily unallowable costs to the contractor in FAR Part 31.. They just aren't  the bonds that paragraph 52.232-5(g) covers. The cost for those subcontractor bonds will have to be amortized through normal progress payments as the work progresses.

ji20874 said:

If I were again in a construction setting, in my contracting officer practice

I would hope that a CO would also consider whether it is the usual practice/policy of the contractor to require sub bonding. As noted in my posts many construction firms have such a policy.

ji20874 said:

The 2005 GSBCA is not persuasive to me.

 My only purpose was to demonstrate that firms do get sub bonding and that agencies do consider such bonding for reimbursement.  I do understand is not spot on as to a BCA taking a definitive position that the clause allows such reimbursement for sub bonding.  My research shows no definitive decision either way.

@ALAL The discussion is about payment.   Payment to the contractor means payment to that contractor for those costs attributable to subs, happens all the time.

Remember a prime may in fact pass all clauses down to a sub as they are found in the primes contract...inclusive of bonding and payment.

I would venture a guess that subcontractor bonding is more prevalent in sole source (non-competitive) negotiated contracts, where there is no price competition. Set-asides, too.  We occasionally saw other prime contracts where the prime required bonds of its largest, key subcontractors. Seldom, if ever on IFB and LPTA. I don’t ever recall a situation where all subs had to provide bonds. 

Might be more prevalent in the past six years. 

BTW, in 1977, for other than 8(a) construction contracting, almost all USACE construction contracting was IFB, low bid.  Central America and Overseas construction contracts used competitively negotiated acquisition. But Central America and overseas contracts used other than performance and payment bonds. Bank letters of Guaranty were the mode.

ALAL said:

I don't think anyone has mentioned one thing that is possibly relevant to this discussion.  That is the definition of "Bond" in the FAR (at FAR 28.001).  It covers only bonds "executed by a bidder or contractor" and "a second party (the 'surety' or 'sureties') . . .." (Emphasis added.)  Therefore, bonds executed by a subcontractor would not be "bonds" for FAR purposes, and presumably not covered by FAR 52.232-5(g).

Flag on the play. Misapplication of a definition.

The definition of "bond" at FAR 28.001 does not apply to the word "bond" as used in FAR 52.232-5. FAR 28.001 begins with "as used in this part--".

Don,  you would essentially render Part 28 meaningless by your stretch that the bonds in a clause prescribed in Part 32 don’t apply to a definition in Part 28. 

Part 28 prescribes the bonding requirements for construction contracts. They can also be used for other than construction.

Part 28 implements what has been known as the Miller Act. That Act serves a significant public purpose to protect labor and to protect those providing materials for Federal construction projects, especially on government property, which isn’t subject to liens. .

In fact most if not all states have adopted what are referred to as “Little Miller Acts”.

https://www.google.com/amp/nationalsurety.com/state-little-miller-acts-what-they-mean-for-contractors/amp/

The Payments clause at 52.232-5  is for FP construction contracts.

It specifically refers to the Performance Bonds and Payment Bonds that were defined, described and required in Part 28 to implement the Miller Act. In fact, the 1977 GAO Decision that we have been discussing and debating in this thread, specifically refers to the Miller Act.

Thus, the clause and Part 28 are harmonious. 

Gimme a break already.

Deleted as duplicate of above post.

Don, it is a whole lot less of a stretch to say that the subcontractor bonds which some prime contractors and sometimes sureties require are NOT the performance and payment bonds referred to in 52.232-5(g), as they are NOT required by the Miller Act or any other public law,  the US is NOT the Obligee, the US can not call or enforce the bonds and the purpose of which is to reduce the cost liability and risk of costs to the surety and to the prime contractor. The taxpayer is, however, footing the bill for those subcontractor bonds.

The prime bond holder must indemnify the bonding company for any losses or unrecovered expenses under the bonds required under the Miller Act. So they are passing certain risks and responsibility to their subs. 

I don’t think that is a stretch at all.

FAR 1.108(a): 

Quote

(a) Words and terms. Definitions in part  2 apply to the entire regulation unless specifically defined in another part, subpart, section, provision, or clause. Words or terms defined in a specific part, subpart, section, provision, or clause have that meaning when used in that part, subpart, section, provision, or clause. Undefined words retain their common dictionary meaning.

The definition of "bond" at FAR 28.001 does not apply to FAR 52.232-5. That is a matter of fact.

Sorry you disagree. I take it then that the Councils should have written a separate payment clause for upfront payments of bonds -AH but payments are under 32.

Since the GAO recommended amending the payments clauses to address upfront reimbursement for Miller Act Bond premiums (for bonds that are required by that law), how do you think that should be done to harmonize Part 28 with the payments clause that is prescribed in Part 32? 

Keep in mind that the justification for upfront payments in lieu of recovering the spread cost as part of progress was based upon the fact that the prime contractor’s bonds are required by law (the then titled Miller Act)

Oh well. 

Lets dot all our i’s and cross al of our t’s because much of the FAR is inapplicable.

joel hoffman said:

the purpose of which is to reduce the cost liability and risk of costs to the surety and to the prime contractor.

And once again your conclusions are skewed to support your position without reference.  Seriously Joel what the heck are coinsurance and reinsurance agreements for but to reduce the cost liability and risk of costs to an insurance company and the prime contractor.   And yes you are right subcontractor bonds do the same thing.  Bonds assure performance and payment, insurance insures against loss.   All walk like a duck, quack like a duck and should be paid for in the same manner.   Get it!

Don--That is not always true.  See FAR 52.202-1, Definitions, specifically item (c).  "When a solicitation provision or contract clause uses a word or term that is defined in the Federal Acquisition Regulation (FAR), the word or term has the same meaning as the definition in FAR 2.101 in effect at the time the solicitation was issued, unless- * * * (c) The part, subpart, or section of the FAR where the provision or clause is prescribed provides a different meaning . . .."

The problem between FAR Part 28 definitions and the payment clause for construction is that the payment clause is prescribed in Part 32, not Part 28.  If the clause prescription was in Part 28, then the Part 28 definition would apply pursuant to the Definitions clause.  As it is, it is (at best) less than clear.  But since it is a clause about payments under construction contracts, and bonds primarily relate to construction contracts, the definition of "bond" that applies to construction contracts seems to me to be the logical definition to apply.

I'm not even sure this issue (about the applicability of 52.232-5(g)) is what the OP was asking about.

ALAL said:

But since it is a clause about payments under construction contracts, and bonds primarily relate to construction contracts, the definition of "bond" that applies to construction contracts seems to me to be the logical definition to apply.

ALAL,

So, in your contracting officer practice, would you refuse to reimburse a prime contractor for subcontractor performance and payment bond premiums based on the thought that subcontractor bonds are not bonds under FAR 52.232-5(g)?

I'm not a contracting officer, and have never been confronted with this question. So, I have not taken a firm position on whether subcontractor bonds are included in the meaning of "bond premiums" in 52.232-5(g).  I tend to think they are not included there, but I'm not really sure.

I also don't have an opinion about whether subcontractor bonds would be an allowable cost under a cost reimbursement contract.  I assume so, but I haven't looked into it, and don't intend to.

I just wanted to point out that there was a lot of discussion about bonds, but nobody even mentioned the FAR definition (I think it's the only FAR definition) of "bond," which does not cover subcontractor bonds.

Thanks.  You made an insightful observation -- but I'm not wholly convinced that the definition of bond in FAR Part 28 excludes subcontractor bonds -- I think the word contractor in the definition is illustrative, not prescriptive.  Many times in the FAR (many, many times), the term contractor also reaches to subcontractor depending on the context -- for example, FAR 31.001 gives a definition of Compensation for personal services -- that definition speaks of "services rendered by employees to the contractor" -- but surely, when the cost principles of FAR Part 31 are applied subcontracts, the word contractor reaches to mean subcontractor? 

An important skill for a contracting officer is to call it, one way or the other -- like an umpire behind the plate.  Some people never develop that skill.  When a contracting officer makes a bad call (or even when the contracting officer makes a good call but someone doesn't like it), the process always allows for a remedy.  I have great respect for contracting officers who make the call on principled and well-thought-out reasons, even if I think I might have decided differently.  As you continue to read here, I hope you will start thinking along the lines of "What would I do in this case?"

C Culham said:

And once again your conclusions are skewed to support your position without reference.  Seriously Joel what the heck are coinsurance and reinsurance agreements for but to reduce the cost liability and risk of costs to an insurance company and the prime contractor.   And yes you are right subcontractor bonds do the same thing.  Bonds assure performance and payment, insurance insures against loss.   All walk like a duck, quack like a duck and should be paid for in the same manner.   Get it!

Of course, the definition of reinsurance in Part 28 doesn’t apply to 52.232-5(g), if the Miller Act bonds don’t  apply to -5(g). 

Edited: However, reinsurance and coinsurance are methods sureties use when they don’t have the capacity to fully bond large construction contracts. I’ve seen contracts where two bonding companies bonded the job. 

Edited- added: I’ve  seen where additional bonding had to be picked up by a second bonding company during the life of the project. Those are examples of what -5(g) is referring to. Look at the continuation sheets for SF 25 and SF25A for example.

Edited- added: And coinsurance and reinsurance don’t increase the cost of the contract. 

Sheesh.

ALAL said:

I'm not even sure this issue (about the applicability of 52.232-5(g)) is what the OP was asking about.

It isn’t what he was asking about.

ji20874 said:

Thanks.  You made an insightful observation -- but I'm not wholly convinced that the definition of bond in FAR Part 28 excludes subcontractor bonds -- I think the word contractor in the definition is illustrative, not prescriptive.  Many times in the FAR (many, many times), the term contractor also reaches to subcontractor depending on the context -- for example, FAR 31.001 gives a definition of Compensation for personal services -- that definition speaks of "services rendered by employees to the contractor" -- but surely, when the cost principles of FAR Part 31 are applied subcontracts, the word contractor reaches to mean subcontractor? 

An important skill for a contracting officer is to call it, one way or the other -- like an umpire behind the plate.  Some people never develop that skill.  When a contracting officer makes a bad call (or even when the contracting officer makes a good call but someone doesn't like it), the process always allows for a remedy.  I have great respect for contracting officers who make the call on principled and well-thought-out reasons, even if I think I might have decided differently.  As you continue to read here, I hope you will start thinking along the lines of "What would I do in this case?"

Subcontractor bonds are not necessarily unallowable under the cost principles. Said that long ago. If it is considered reasonable for the circumstances, such as have been discussed early in this thread, then they can be included in the contract price. 

Subcontractor performance and payment bonds don’t meet the definition of Miller Act Bonds, that’s all.

They are commercial performance and payment bonds. They protect the prime’s bonding company and the prime.  

They aren’t required or even covered under the Miller Act.

The government is not the obligee. 

The prime must indemnify it’s bonding company for any losses- un-recovered expenses. It’s easier for the prime to make a claim against the subs bond than it is to have to sue to recover losses from a responsible sub.

I wonder how much experience some people here actually have  in administering construction contracts, reviewing and processing consents of surety, dealing with sureties and their bonding agencies,, negotiating and dealing with Tender and Release agreements, Takeover agreements, etc., etc. , handling construction progress payments with numerous CLINs and SubCLINs, etc that are inclusive of bond premiums and which may involve multiple subcontractors. 

Its a rhetorical question - some of the responses here make me wonder how many people have suddenly become experts in this area.

ALAL said:

Don--That is not always true.

What is not always true?

ALAL said:

I just wanted to point out that there was a lot of discussion about bonds, but nobody even mentioned the FAR definition (I think it's the only FAR definition) of "bond," which does not cover subcontractor bonds.

Why should "contractor" be interpreted as "prime contractor" in the FAR definition of "bond"?

joel hoffman said:

I wonder how much experience some people here actually have  in administering construction contracts, reviewing and processing consents of surety, dealing with sureties and their bonding agencies,, negotiating and dealing with Tender and Release agreements, Takeover agreements, etc., etc. , handling construction progress payments with numerous CLINs and SubCLINs, etc that are inclusive of bond premiums and which may involve multiple subcontractors. 

Its a rhetorical question - some of the responses here make me wonder how many people have suddenly become experts in this area.

How dare you!  I strongly suggest that you remove this post.

joel hoffman said:

The government is not the obligee.

Wrong!     "Where a subcontractor furnishes a bond, however, the obligee may be the owner or the prime contractor or both."  NACM’s Manual of Credit and Commercial Laws, 104th edition.

aka Dual-Multiple Obligee Rider

I will read this thread but I will not be responding further as it is clear that no reference can be provided that supports that a subcontractor bond cost can not be reimbursed in the manner I have repeated in a couple of posts.  When a reference is provide d I will respond as appropriate.

joel hoffman said:

I wonder how much experience some people here actually have  in administering construction contracts, reviewing and processing consents of surety, dealing with sureties and their bonding agencies,, negotiating and dealing with Tender and Release agreements, Takeover agreements, etc., etc. , handling construction progress payments with numerous CLINs and SubCLINs, etc that are inclusive of bond premiums and which may involve multiple subcontractors. 

Its a rhetorical question - some of the responses here make me wonder how many people have suddenly become experts in this area.

Hmmm... I wonder if this comment was aimed at me?

This isn't a rhetorical question.

C Culham said:

How dare you!  I strongly suggest that you remove this post.

Wrong!     "Where a subcontractor furnishes a bond, however, the obligee may be the owner or the prime contractor or both."  NACM’s Manual of Credit and Commercial Laws, 104th edition.

aka Dual-Multiple Obligee Rider

I will read this thread but I will not be responding further as it is clear that no reference can be provided that supports that a subcontractor bond cost can not be reimbursed in the manner I have repeated in a couple of posts.  When a reference is provide d I will respond as appropriate.

The US Government has no privity of contract with subcontractors to an 8(a) or subcontractors to a prime contractor. 

A specific exception could sometimes be a Tri-party Takeover Agreement with a completion subcontractor - however , in that case, the existing bond remains in force. No new bond is furnished and the government wouldn’t pay for it anyway.

In a Tender and Release, the surety provides for a new prime and surety to substitute and takeover completion of the work. In that event, we required the surety to remain responsible for any latent defects, gross mistakes, and anything else that the new contractor wouldn’t be responsible for.  We issued separate contracts to the new contractor(s) with new bond(s). 

However, to the best of my recollection, we  didn’t get any pay request for the new bond. The original sureties assumed those costs and may or may not have recouped it from the original prime. 

Sorry that you don’t seem to understand the Digest to the GAO Decision which you hung your hat on. The GAO described how it would be legal to make upfront reimbursement for bonds, if the FPR and ASPR were to be amended accordingly. 

I just got off the phone with a friend of mine, who is a local surety bonding agent for several sureties. He confirmed that he regularly sells bonds for federal government construction contracts as well as for state, local and private construction. 

We discussed subcontractor bonds for those types of construction contracts. 

Subcontractor bonding is more prevalent on private construction that for federal construction. It is generally used when the surety won’t or is reluctant to pre-approve a prime contractor for the size and/or complexity of a construction  project without obtaining subcontractor bonds from its MAJOR subcontractors and/or subcontracts over some determined $ limit.

He doesn’t recall a surety requiring all subs to provide bonds. 

He said - without me prompting - that a subcontract bond on a federal contract is between the prime and the sub; that the purpose is for the benefit and protection of the prime and its surety.

He said that the oblugee(s) on those type bonds are the prime and or the prime and the surety. He said that the federal government is not an obligee because “there is no contract between the subcontractor and the government”. 

He said that the owner on a private construction project could be named as an obligee.He said that a surety may require those major subs to bond part of the prime contract or may write the bond for the entire amount but require that it will be the obligee, etc. Depends upon many factors.

He also stated, without my input (paraphrasing here) : “a bond is not an insurance policy because, unlike instance, anything that the surety has to pay out beyond recovery will be recouped from the bonded contractor, to the extent that it can recover the loss. 

He said it would be a very complex task to administer contracts as an obligee on multiple bonds even without bond claims.

Nobody here has shown how subcontractor bonds meet the criteria for bonds required by law (Specifically, Miller Act as stated in the Decision).

Have you or anyone else found the background information for the amended ASPR and FPR clauses to support your assertions that they allow reimbursement for anything other than Miller Act required  bonds? 

If so, please share. Thanks.

ji20874 said:

Hmmm... I wonder if this comment was aimed at me?

This isn't a rhetorical question.

Not necessarily. 

However, I am puzzled why nobody here seems to understand or acknowledge what the GAO decided would be the legal basis for amending the ASPR and FPR in order to allow the government to make upfront payments. 

Now some seem to be arguing or implying  that there is no difference between a sub and a prime and/or a Miller Act Bond and a subcontract bond under Part 28.

The GAO noted the recommendations of those asking for its opinion whether and  how to pay the bond premiums upfront , including subcontractor bonds vs. amortizing them as the work progresses or in a mobilization and predatory bid item, similar to non federal construction contracts. The GAO had previously held that they weren’t eligible as mob and predatory expenses or payable upfront. 

Nobody, including me has seen the implementing background for the amended ASPR/FPR payment clauses. I’ve got the ASPR clause somewhere at home but haven’t found it.

The ASPR was superseded by the Defense Acquisition Regulations (DAR) in 1978. 

 Some folks don’t understand the distinctions between federal construction contract bonding and bonding, in general. Most or all states have adopted “little Miller Acts” for public contracting . But I am not familiar with the details or distinctions between those state statutes or between them and the federal statute. 

Private and commercial construction contract are diverse and can use varied types of surety bonding.

joel hoffman said:

Not necessarily.

But maybe?  Partly?  If you're dismissing me from the conversation for an assumed lack of experience or credentials, I'd like to know. 

joel hoffman said:

I am puzzled why nobody here seems to understand what the GAO decided would be the legal basis for amending the ASPR and FPR in order to allow the government to make upfront payments.

Maybe because the GAO decision was made in the pre-FAR days, and presumably, the FAR drafters gave appropriate consideration to the matter.  Thus, we work with the FAR text today.  Today, it is common knowledge that performance and payment bond premium reimbursements are not advance payments. so we no longer need to refer back to the 1977 case to support that understanding.

It is true that federal construction contract bonding is not an easy subject.  It is better when the discussion is narrow (namely, federal construction contract bonding).  There is no purpose of introducing little Miller Act or private bonding practices unless as a comparison, but really, these topics are not relevant to our discussion.

Ah, ji, but I think they are extremely relevant to understand the specific distinctions between federal bonding requirements and other bonding practices. Especially when people say that “it’s is common...”

Im not dismissing you, ji. 

I wouldn’t dismiss that GAO opinion, either though. I don’t think that the laws limiting progress payments have changed  since 1977.

I joined the USACE in 1980.  The way I described how prime contractor bond premiums are reimbursed was the way it was done in 1980 and, as far as I know, it’s still the same way now. There was an attempt to use a separate CLIN for bonds back in the 1990’s but it was discontinued shortly thereafter. The UASCE uses a standardized Contract Admin software program that provides for a prime contractor performance and payment bond reimbursement up front. Then the software liquidates it as progress is earned. 

If one mixes subcontractor bonds into that  reimbursement, it can’t be correctly liquidated because subcontractor bonds/work is not a spread cost over the entire contract amount.  And, where there are multiple line items, is specific to certain line items. 

Someone suggested that you can separate the bond and administratively adjust all the affected CLIN amounts in the invoice payment.  Not in our system. The progress pay estimates are interlinked with all of the other financial and contract admin software syStems. They must reflect the contractual line item amounts. 

And then, what happens if a sub defaults or is otherwise replaced before or during performance? The government has reimbursed a subcontract bond payment before it was earned and won’t be earned. That isn’t in the interest of either the prime or the government. 

You may end up with contract admin accounting nightmares.

As I shared earlier,

On ‎9‎/‎18‎/‎2019 at 10:02 AM, ji20874 said:

If I were again in a construction setting, in my contracting officer practice I might be willing to reimburse subcontractor bond premiums under FAR 52.232-5(g) if subcontractor bonds were required--

1. by the prime contract; or 
2. by the prime contractor's surety as common practice in the industry (in contrast to elective self-protection choices made by the prime contractor).

I'm comfortable with that approach.  I've done a lot of construction contracting, but I have not yet seen 1. or 2. in real life.

As I understand things, bond premium reimbursements don't need to be liquidated, for either or both of two reasons:  First, the contractor is required to deliver performance and payment bonds, and does so, so it is entitled to full payment.  Second, I would not want to impose the liquidation philosophy for other progress payments (such as in the clause of FAR 52.232-16, Progress Payments) on payments for construction contracts under FAR 52.232-5, Payments Under Fixed-Price Construction Contracts.  A construction progress payment is not a progress payment that has to be liquidated; rather, it is a progress payment that reflects the percent complete.  The concept of liquidating progress payments applies to services and supplies, not construction (see the definition of liquidate in FAR 32.001).  At least, that's how I understand things.

I hate it when our automated systems dictate to us, rather than helping us.  I hate it when automated systems take away flexibility we would otherwise have under the law.  I hate it when our automated systems impose requirements that aren't real (such as your automated system trying to liquidate construction progress payments).

ji20874 said:

As I understand things, bond premium reimbursements don't need to be liquidated, for either or both of two reasons:  First, the contractor is required to deliver performance and payment bonds, and does so, so it is entitled to full payment.

ji, by “liquidated”, the GAO (in the 1977 Decision) and I don’t mean that the government is taking back the bond premium money that it paid up front.

What happens is this- as the contractor reports, for example , 10% progress in a subsequent payment estimate. Thus, 10% progress will include 10% of the bond premium which has already been paid.

The payment estimate form that we use will show for that payment estimate a cumulative 90% for the bond and 10% progress. That plus stored materials is total earnings to date.

 Then we subtract previous payments from the latest cumulative total earnings to calculate the amount of the progress payment. 

It looks weird but since we are subtracting previous total earnings from current earnings it works out. 

This goes on the same way for each progress payment request until bond payment shows zero and  progress shows 100% 

The trick is basically total current earnings minus previous total earnings. 

I mentioned how stored materials are handled only to use a an example. As stored materials come out of the inventory they go into the work progress so that there is no double payment for the same materials. Each pay estimate includes the updated value of overall stored materials. Eventually that is reduced or liquidated to zero as materials are incorporated into the work. (Zeroed Out as progress accumulates.) 

I’m simplifying that a bit for materials but am explaining it that way for illustrative purposes. 

That what I meant by liquidating the bond payment  it is absorbed into the line items that comprise total progress to date. The overall amount paid isn’t affected by this method. 

It.  looks more complicated than it is. In an early assignment,  I used to  prepare all the monthly construction payment estimates by hand, using my trusty TI-30 calculator.

Oh - ji, we still disagree about up front payment for any subcontractor bond premiums unless they are required by the contract - AND show the government as the obligee. That would be a VERY rare occurrence.

Well, I think you are making it too hard.  Liquidation is required for "normal" progress payments in contracts for supplies and services using the Progress Payments clause, but applying that approach to construction progress payments seems to me to be unnecessary and is neither required nor contemplated by the FAR or the Payments Under Fixed-Price Construction Contracts clause.

ji20874 said:

Well, I think you are making it too hard.  Liquidation is required for "normal" progress payments in contracts for supplies and services using the Progress Payments clause, but applying that approach to construction progress payments seems to me to be unnecessary and is neither required nor contemplated by the FAR or the Payments Under Fixed-Price Construction Contracts clause.

It has been done for decades on hundreds of billions of dollars of construction contracts for stored materials and for upfront bond payments since sometime after 1977. They were doing it in 1980, when I started with USACE.

Stored materials are materials and equipment that have been reimbursed up front prior to incorporation into the work . The paid inventory is liquidated (the cumulative amount of stored materials is zeroed out) as the material is incorporated into the work.

Look at bond reimbursement similarly as the unliquidated bond premium is subsequently incorporated into the cumulative earned progress on in place work. 

 Another way is to use a separate line item which is paid for based upon paid receipts. However, it is clunky in my opinion - I’ve used that method during a USACE trial period in the early 90’s.  The line item didn’t always match the actual cost of the bonds, so the contractor had to wait until the end of the contract to be paid the full line item amount. And it raised eyebrows like in the GSBCA defective pricing claim. The separate line item skewed earned progress too.

Liquidating bond payments were mentioned in the GAO decision on page 5, in reference to earlier GAO decisions. So, it was either proposed or being done prior to that.

its not rocket science. It’s good contract administration. 😃

Payment for mobilization and prepatory  work is sometimes liquidated into the multiple earned progress line items if there isn’t a separate line item and where it can’t be identified with specific line items.

A separate line item was also clunky in practice. Contractors often front end loaded that line item for early payment. Different methods were used to allow payment and many were controversial.

joel hoffman said:

It’s good contract administration.

I'll accept that as your opinion.  

I cannot speak to USACE practices in 1977 and 1980, but I will accept your assertions that USACE had a practice of liquidating progress payments on fixed-price construction contracts in those days.

I hope you will accept the following as facts--

1. “Liquidate means to decrease a payment for an accepted supply item or service under a contract for the purpose of recouping financing payments previously paid to the contractor."  See FAR 32.001 (emphasis added).  
2. The clause at FAR 52.232-5, Payments Under Fixed-Price Construction Contracts, neither requires nor contemplates liquidation of construction progress payments.  See FAR 52.232-5.
3. In contrast, the clause at FAR 52.232-16, Progress Payments, does require liquidation of progress payments where progress payments are based on incurred costs.  However, that clause is not applicable to fixed-price construction contracts.  See FAR 32.500.

Because on these facts, and consistent with my understanding that progress payments based on percent complete are wholly different from progress payments based on incurred costs (notwithstanding the similar use of "progress payments" as a term), I do not liquidate progress payments in fixed-price construction contracts in my contracting officer practice.  I simply administer the clause at FAR 52.232-5 as it is written. I see this as good contract administration.

You aren't going to persuade me to change my practice.  If you want to continue the exchange, can we limit it to whether I have presented the facts correctly in 1, 2, and 3 above?

ji20874 said:

I'll accept that as your opinion.  

I hope you will accept the following as facts--

1. “Liquidate means to decrease a payment for an accepted supply item or service under a contract for the purpose of recouping financing payments previously paid to the contractor."  FAR 32.001, emphasis added.  
2. The clause at FAR 52.232-5, Payments Under Fixed-Price Construction Contracts, neither requires nor contemplates liquidation of construction progress payments.

Definition of recoup from Merriam -Webster:

“Definition of recoup

transitive verb

1a: to get an equivalent for (losses) : make up for

b: REIMBURSE, COMPENSATErecoup a person for losses

2: REGAINan attempt to recoup his fortune

intransitive verb

: to make good or make up for something lost”

Well, we aren’t “recouping” any financing payments. Maybe there is a better term but it is simply an accounting exercise. As the unliquidated balances of reimbursed stored materials, paid bond premiums, mobilization and predatory work, etc.  decrease, the values are incorporated into the progress of inplace work, when there are not separate line items for those items. It balances out and the contractor isn’t paying anything back or losing any pay. 

The committe that recommended and sought GAO approval to pay the bond premiums up front actually proposed to use that method.

What is so hard to understand about that?  

People need to understand that the FAR doesn’t have the answer to every aspect and detail of good contract administration procedures.

Thus, in response to your point number 2., the clause doesn’t have to specifically provide step by step instructions or specifically “require” or “contemplate” liquidating upfront payments for bonds, stored materials, mobilization and predatory work, etc. someone had to figure out a way to do it so that we don’t double pay for such items. 

as for difficult? I was once the office engineer (contract administrator) for a resident engineer office with 20 active ongoing contracts. Some contracts had upwards of 80 line items.  I processed monthly Payment Estimates during a certain two or three day period every month - it was all done by hand on calculators and IBM Selectric typewriters. We had programmable Monroe calculators for the big contracts, which handled the math equations.  Our jobsite QA personnel jointly reviewed and confirmed the contrActor’s reported progress for the contractor to submit with its payment request My  actual math and hand write up only took a couple of hours for all 20 contracts. The secretaries’ typing and the paperwork preparation and our monthly reports consumed most of the time during that three day period.

With computerized contract admin software nowadays, it takes a matter of minutes for each contract after the field agrees on progress. In many USACE offices these days the same person assigned to a contract handles both CA and QA duties. It’s not difficult or cumbersome. The programmers have written the logarithms.

We don’t need to debate any longer..

So, am I right in thinking that you don't agree with the three facts?

joel hoffman said:

What is so hard to understand about that?

I'm not the problem.

joel hoffman said:

We don’t need to debate any longer..

Okay.  But if you do want to continue, please, let's limit it to whether I have presented the facts correctly in 1, 2, and 3 above.  I will be unable to see any merit in your position so long as those three facts stand in the way.

ji20874 said:

So, am I right in thinking that you don't agree with the three facts?

I'm not the problem.

Okay.  But if you do want to continue, please, let's limit it to whether I have presented the facts correctly in 1, 2, and 3 above.  I will be unable to see any merit in your position so long as those three facts stand in the way.

See my edited response to your point number two above. Actually, it also addresses your point number 1 for the same reason.

In addition to the above, for points Numbers 1 and 2, 

The FAR isn’t a cookbook for every aspect and step by step procedure for C.A.. 

As is often pointed out by Contracting Officers and others in this forum, please see 1.102(d).

I didn’t see your edited post which added point number three. 

Regarding your point number three, I agree that it isn’t relevant to fixed price construction progress or final payments.

FACTS –

1. Bond premiums of a subcontractor are an allowable cost. (FAR 31.205-4) therefore they may be a direct cost.

2. There is no Federal regulation as to where a contractor when pricing a Federal contract must place this allowable cost in their pricing and in an instant contract CLIN structure.   Likewise there is no privity of the government to stipulate to a prime contractor the terms and conditions of a subcontract with regard to subcontractor bond premiums and how such bond cost will be placed subcontractor pricing.  Therefore a subcontract agreement can stipulate that the prime contractor will reimburse a subcontractor for subcontractor bond premiums upon presentation/substantiation of the subcontractor’s payment for bonds and the prime contractor can show this cost as a direct cost in their contract pricing.

3. Payments under FAR 52.232-5 are not contract financing payments (FAR 32.001)

4. As a payment under 52.232-5 is an invoice payment it is subject to the Prompt Payment Act (FAR 32.001).

5. Subject to the Prompt Payment Act FAR 52.232-27 prescribes certain requirements for placing prompt payment terms in subcontracts and recognizes the ability of a prime contractor and its subcontractors to address payment for subcontractor bonds.

6. 52.232-5 as well as 52.232-27 requires the prime contractor to certify that invoice payments received have been used to pay subcontractors and that timely payments will be made from the instant payment requested in accordance with subcontract agreements.  As a subcontractor agreement can provide for reimbursement of bond premiums the prime contractor can therefore certify a subcontractor bond premium payment.

7. 52.232-5(g)  provides that bond premiums may be reimbursed after the Contractor has furnished evidence of full payment to the surety and that retainage provisions do not apply to the reimbursement.

8. 52.232-27 provides a nexus to the 52.232-5(g) reference on reimbursement of bond premiums with no retainage as relating to subcontractor bonds where at 52.232-27(d)(1) it states “Retainage permitted. Permit the Contractor or a subcontractor to retain (without cause) a specified percentage of each progress payment otherwise due to a subcontractor for satisfactory performance under the subcontract without incurring any obligation to pay a late payment interest penalty, in accordance with terms and conditions agreed to by the parties to the subcontract, giving such recognition as the parties deem appropriate to the ability of a subcontractor to furnish a performance bond and a payment bond.”

9. 52.232-5(g) does not provide that only contractor bonds provided under the Miller Act will be reimbursed what it does provide is that the government will  “reimburse the Contractor for the amount of premiums paid for performance and payment bonds”

These facts from the FAR substantiate that a prime may require subcontractors to provide bonds, that the cost for such bonds is an allowable and direct cost to a contract; that payment for such cost is not contract financing (nor advance payment) but an invoice payment and as such the prime can be reimbursed upon invoice substantiation of subcontractor bonds.

Joel,

Here are the facts as I understand them:

1. “Liquidate means to decrease a payment for an accepted supply item or service under a contract for the purpose of recouping financing payments previously paid to the contractor."  See FAR 32.001 (emphasis added).  
2. The clause at FAR 52.232-5, Payments Under Fixed-Price Construction Contracts, neither requires nor contemplates liquidation of construction progress payments.  See FAR 52.232-5.
3. In contrast, the clause at FAR 52.232-16, Progress Payments, does require liquidation of progress payments where progress payments are based on incurred costs.  However, that clause is not applicable to fixed-price construction contracts.  See FAR 32.500.

For 1, I'm understanding that you want to read fixed-price construction into the definition of "liquidate."  I prefer not to.

For 2, I'm understanding that your point is that liquidation is not prohibited, and is therefore allowable if it is seen as a sound business practice.  I wholly agree with FAR 1.102-4(d), but I'm not convinced it is a sound business practice, so I have two questions-- 

• In your practice, do you have a USACE or home-made clause that provides liquidation instructions, including, most importantly, a liquidation rate?  
• I found the USACE CONTRACT ADMINISTRATION MANUAL FOR CONSTRUCTION CONTRACTS, SOUTH ATLANTIC DIVISION, SADDM 1110-1-1, on the internet.  The entire Chapter 4 is about administering progress payments for construction contracts -- Chapter 4 has 20 pages of text on administering progress payments and additional many pages of very detailed how-to exhibits for administering and computing and making progress payments, but there is zero discussion, not a single word, about liquidating progress payments.  Does USACE have another manual that teaches why and how to liquidate progress payments on fixed-price construction contracts?

 

For 3, I am hopeful that we agree, inasmuch as you already said we do.  However, I am concerned that you might be using 52.232-16 procedures in your practice of liquidating progress payments payable under 52.232-5, as I do not know where else the procedures for that process come from.

Carl,

I agree that progress payments made under FAR 52.232-5 are not contract financing payments, and I appreciate your raising this fact.  This is another reason why I am not ready to agree that those progress payments require liquidation.  Joel has been trying to convince me, but this is another hurdle I will have to overcome before I can agree.

We're a long way from the original posting.

Unfortunately, Carl still fails to recognize that the digest of the 1977 GAO decision explains what the bond payment is for and why; and that the body of the decision explains why the GAO said that upfront payments don’t qualify as mobilization or prepatory work and that they are a requirement of the law.

Notwithstanding that, Carl - how would you administratively handle subsequent progress payments on contracts with when subcontractor bonds are handled aAs upfront payments with one or more line items for progress.

When a construction contract has several line items, individual subcontracts generally aren’t included (spread over)  all line items. 

Would you establish a separate line item that would include all bonds, including those that do not benefit or protect the government?

ji20874 said:

Joel,

Here are the facts as I understand them:

1. “Liquidate means to decrease a payment for an accepted supply item or service under a contract for the purpose of recouping financing payments previously paid to the contractor."  See FAR 32.001 (emphasis added).  
2. The clause at FAR 52.232-5, Payments Under Fixed-Price Construction Contracts, neither requires nor contemplates liquidation of construction progress payments.  See FAR 52.232-5.
3. In contrast, the clause at FAR 52.232-16, Progress Payments, does require liquidation of progress payments where progress payments are based on incurred costs.  However, that clause is not applicable to fixed-price construction contracts.  See FAR 32.500.

For 1, I'm understanding that you want to read fixed-price construction into the definition of "liquidate."  I prefer not to.

For 2, I'm understanding that your point is that liquidation is not prohibited, and is therefore allowable if it is seen as a sound business practice.  I wholly agree with FAR 1.102-2(d), but I'm not convinced it is a sound business practice, so I have two questions-- 

• In your practice, do you have a USACE or home-made clause that provides liquidation instructions, including, most importantly, a liquidation rate?  
• I found the USACE CONTRACT ADMINISTRATION MANUAL FOR CONSTRUCTION CONTRACTS, SOUTH ATLANTIC DIVISION, SADDM 1110-1-1, on the internet.  The entire Chapter 4 is about administering progress payments for construction contracts -- Chapter 4 has 20 pages of text on administering progress payments and additional many pages of very detailed how-to exhibits for administering and computing and making progress payments, but there is zero discussion, not a single word, about liquidating progress payments.  Does USACE have another manual that teaches why and how to liquidate progress payments on fixed-price construction contracts?

 

For 3, I am hopeful that we agree, inasmuch as you already said we do.  However, I am concerned that you might be using 52.232-16 procedures in your practice of liquidating progress payments payable under 52.232-5, as I do not know where else the procedures for that process come from.

Geez, ji, we aren’t using 52.232-16 procedures. The method of transferring unliquidated balances for those type of activities into the CLIN items has been used for stored materials, mobilization and prepatory work and for bonds for decades, including years before the FAR was published - for hundreds of billions of dollars of construction contracts. 

Unless the USACE RMS automated contract admin software has been recently changed, that is how progress payments are processed. 

Since some of you have pointed out the recommendation of the committee to the GAO back in 1977 their proposed practice for (insert your preferred term here) that GAO referred to was the same one that I am referring to. 

so, in your experience, ji, how do you (insert your preferred term here) so that you aren’t double paying for stored materials, bonds, mobilization and predatory work, etc.?  As far as I know, one cannot administratively revise the CLIN amounts in payment estimated to separate bond premiums, stored materials, mobilization and prep work  from the rest of the contract amounts. One would have to establish separate line items, unless you (insert your preferred term here to avoid double payment and to accurately measure earned progress of in-place work.

ji20874 said:

Carl,

I agree that progress payments made under FAR 52.232-5 are not contract financing payments, and I appreciate your raising this fact.  This is another reason why I am not ready to agree that those progress payments require liquidation.  Joel has been trying to convince me, but this is another hurdle I will have to overcome before I can agree.

We're a long way from the original posting.

Agreed.   Interesting that there is no argument that a "contractor" can be paid for material delivered to site, even if delivered under a subcontact, but by golly do not pay contractor for a bond delivered by a subcontractor????????????

joel hoffman said:

Notwithstanding that, Carl - how would you administratively handle subsequent progress payments on contracts with when subcontractor bonds are handled aAs upfront payments with one or more line items for progress.

Same way that you do for bonds if only provided by the prime.

joel hoffman said:

1977 GAO decision

Geez Joel  haven't your exhausted this yet.  There is an alternative way to emphasize the Digest just to humor you but my hope is that you look at the matter in the here and now of the FAR.

"MATTER  Reimbursements of TOTAL performance or payment

bond  premiums to contractor in first progress payment.

DIGEST:  Reimbursement to Government contractors of the TOTAL AMOUNT OF PAID PERFORMANCE AND PAYMENT BOND PREMIUMS …"

C Culham said:

Agreed.   Interesting that there is no argument that a "contractor" can be paid for material delivered to site, even if delivered under a subcontact, but by golly do not pay contractor for a bond delivered by a subcontractor????????????

Same way that you do for bonds if only provided by the prime.

Geez Joel  haven't your exhausted this yet.  There is an alternative way to emphasize the Digest just to humor you but my hope is that you look at the matter in the here and now of the FAR.

"MATTER  Reimbursements of TOTAL performance or payment

bond  premiums to contractor in first progress payment.

DIGEST:  Reimbursement to Government contractors of the TOTAL AMOUNT OF PAID PERFORMANCE AND PAYMENT BOND PREMIUMS …"

“Total” vs.” paid contractor bond premiums as earned in progress payments”.  That what they Were talking about

sorry that you keep reading that out of the context of the Decision and keep ignoring the rest of the digest as well as the totality of the GAO position, including prior decisions which still were valid, except as clarified  . The words as  “they are...required by law” don’t appear to mean anything to you.

Joel,

LIQUIDATING PROGRESS PAYMENTS

So, I'm understanding that there is no USACE manual that teaches USACE contracting officers why and how to liquidate progress payments on fixed-price construction contracts.

And, I'm understanding that there is no USACE or home-made clause that provides liquidation instructions, including, most importantly, a liquidation rate.  One might think that establishing the liquidation rate would be very important in forming the contract.  I'm glad you don't apply 52.232-16 principles, but I'm still in the blind as to where your procedures are written, if not in the contract and if not in USACE manuals.

I understand you do it based on 1977 and 1980 practices and other understandings you have picked up along the way.  I'm okay with that.  For my own practice, this discussion has not convinced me to start liquidating progress payments on fixed-price construction contracts, and I'm certainly within FAR 1.102-4(d).

SUBCONTRACTOR BONDS

I note that the USACE manual I referenced earlier expressly prohibits USACE contracting officers from reimbursing subcontractor bond premiums under para. (g) of the clause, and I agree that USACE contracting officers should follow USACE instructions.  However, it doesn't prohibit considering subcontractor bond premiums for progress payments under para. (b) of the clause, and in any case it isn't dispositive on non-USACE contracting officers.

I can give my own answer to the question you asked Carl.

I would handle each subsequent progress payment request exactly as stated in the 52.232-5 clause (I'm big on staying in my lane).  For me, any progress payment has to be based on my agreement with the contractor's estimate of work complete.  Based on the clause (I'm big on staying in my lane), I never make progress payments based on incurred costs (except for bond premiums as allowed by para. (g), where I see delivered bonds as contributing towards completion); rather, I make progress payments based on either on (1) percent estimate complete; or (2) agreed-to pay items specified in the contract, which is a construct of work complete. So, regarding subcontractor bonds and para. (b) of the clause--

• (1) If the contract did not have agreed-to pay items, then I might (not definitely would, but might) take the fact of subcontractor bond delivery (not the incurred cost of the bonds) into consideration when coming to my percent estimate of completion.
• (2) If the contract did have agreed-to pay items, then a progress payment for subcontractor bonds would be appropriate only if one of those pay items reached that far.

joel hoffman said:

so, in your experience, ji, how do you (insert your preferred term here) so that you aren’t double paying for stored materials, bonds, mobilization and predatory work, etc.?  As far as I know, one cannot administratively revise the CLIN amounts in payment estimated to separate bond premiums, stored materials, mobilization and prep work  from the rest of the contract amounts. One would have to establish separate line items, unless you (insert your preferred term here to avoid double payment and to accurately measure earned progress of in-place work.

It seems to me that your focus is on costs incurred by the contractor.  Your question here is based on that premise, which I see as faulty.  Another seemingly faulty premise:  that progress payments under the clause at FAR 52.232-5 must be liquidated against later payments.

In a fixed-price construction contract using the clause at FAR 52.232-5, progress payments are not based on incurred costs; rather, they are based on "estimates of work accomplished which meets the standards of quality established under the contract, as approved by the Contracting Officer."  See para. (b) of the clause.  Sometimes I shorthand this as percent complete, or estimate complete, and so forth.

As long as a contracting officer approves progress payments based on estimate complete, there is zero possibility of so-called double payments.

In my practice, and amendable to the clause at FAR 52.232-5, Payments Under Fixed-Price Construction Contracts, incurred costs are not dispositive as a basis for progress payments, except as allowed by para. (g) of the clause.  Even there, I tend to treat bond costs under para. (g) as contributing to completion under para. (b).  Indeed, incurred costs are largely irrelevant and will never persuade me to approve a progress payment that goes beyond the work complete -- however, I note that sometimes, incurred costs and work complete may coincidentally (even serendipitously?) align.

Regarding separate line items, a construction contract may have one CLIN and several progress payment pay item lines.

p.s.  I know my practice differs from yours, but it is wholly consistent with the clause at FAR 52.232-5, Payments Under Fixed-Price Construction Contracts.  I didn't learn in USACE (an acknowledged expert in construction contracting) -- most of my learning was from FHWA (an acknowledged expert in construction contracting).

ji, let me clarify, reiterate, state or whatever that upfront contractor bond premium reimbursement by the government isn’t considered “progress”. Incurred costs are NOT progress. Thus it can’t be paid as “progress” or included as a percentage of progress.  If the bond is one percent of the cost of the contract, then the contract isn’t one percent complete nor is a line item one percent complete based upon the paid premium. See the long held GAO DecisionSSS references in the 1977 decision for verification. Thus, the payments clause allows a separate reimbursement for the contractors incurred bond premiums required by law.

Bond premiums are based upon the total cost. I have never seen a contractor not spread the bond cost over the total contract amount because it is generally applicable and allocable to all costs and other markups in the price.

Unless there is a separate line item for bonds, prime bonds are presumed to be spread per normal accounting practices across all line items proportionately. 

Once the contractor earns progress on acceptable work performed, the bond cost is included in the earned progress amounts (example 2% added to the cost plus other markups in the CLIN price).

Unless already in a separate CLIN, 30% reported progress on a Lump sum CLIN will be presumed to include 30% of the bond cost allocated to that line item. 

For unit priced items,  the 2% bond cost is presumed to be in the unit price. So bond is being counted as units are performed as work. 

So - if you reimbursed the primes bond premium upfront and then all reported progress includes 2% for bond premium, how do you handle the FACT that you already paid the bond that is now part of the reported work progress?

•Do you subtract 2% from the reported work progress for lump sum items to avoid double payment? That would be an incorrect report of actual earned progress. 

•Do you reduce the number or amount of unit priced items to reduce the progress by 2% to insure no double payment? That would be lying. 

—————————————-

For subcontract bonds - you can’t count the total subcontract premium as progress  -  as a percent of lump sum line items any more than you can for the prime contractor .Incurred cost isn’t earned progress.

For unit priced items, you can’t add extra quantities to to pay upfront subcontractor bonds. 

As an aside, the Corps of Engineers was a leading member of the committee that made the recommendation to GAO. If the USACE doesn’t allow upfront subcontractor bond reimbursement, then it likely interpreted the GAO’s Decision the same way I do here.

ji, how about this as a simpler explanation of the concept:

When there is not a separate line item for the prime contract bond,  as work progress is earned (which includes allocated bond cost), the amounts shown for upfront prime contractor bond payment are “absorbed” into the reported progress of work performed until, at some point, the entire upfront payment is zeroed out.

Would that be a clearer explanation?

joel hoffman said:

let me clarify, reiterate, state or whatever that upfront contractor bond premium reimbursement by the government isn’t considered “progress”. Incurred costs are NOT progress. Thus it can’t be paid as “progress” or included as a percentage of progress.

I disagree.

I recommend that you read the clause at FAR 52.232-5, Payments Under Fixed-Price Construction Contracts.  In para. (g), the paragraph that allows for reimbursement of bond premiums, the text says, "In making these progress payments..."  In my reading, bond premium reimbursements are part of the progress payments process.

Again, I recommend that you read the clause.  That's what I do in my practice -- I read the clause, and then I do what the clause says.  It's simple, and it is fair because that is the bargain both parties agreed to in forming the contract.  It has worked successfully for me for many years.

I'm going to bow out now.  Best wishes to you.

To all WIFCON readers who are still paying attention, here's my simple advice:  Read the clause, and then do what the clause says.

ji20874 said:

I disagree.

I recommend that you read the clause at FAR 52.232-5, Payments Under Fixed-Price Construction Contracts.  In para. (g), the paragraph that allows for reimbursement of bond premiums, the text says, "In making these progress payments..."  In my reading, bond premium reimbursements are part of the progress payments process.

Again, I recommend that you read the clause.  That's what I do in my practice -- I read the clause, and then I do what the clause says.  It's simple, and it is fair because that is the bargain both parties agreed to in forming the contract.  It has worked successfully for me for many years.

To all WIFCON readers who are still paying attention, that's my simple advice:  Read the clause, and then do what the clause says.

I'm going to bow out now.

The primes bond payment is included under paragraph(g) in the progress estimate. It is not considered “work accomplished which meets the standards of quality established under the contract”.

“b) Progress payments. The Government shall make progress payments monthly as the work proceeds, or at more frequent intervals as determined by the Contracting Officer, on estimates of work accomplished which meets the standards of quality established under the contract, as approved by the Contracting Officer.” 

Prime contractor incurred cost for bond payments are not “work accomplished. “

Incurred costs on their own are not “work accomplished”

incurred costs on their own are not “progress.”

Examples of incurred costs specifically authorized in the clause  to be included in progress payments which are not “work accomplished and which are not “progress” include on-site stored materials, paid for off-site stored materials that are specifically authorized in the contract,  prepatory work and prime contractor performance bond payments.

Please read the bottom of the 1977 GAO decision for the reason you can’t count full payment of a bond premium as % of “progress” under the line item(s) for “work accomplished” before the “work is accomplished”.

If you could do that there would have been no need to amend the “ payment” clauses in the first place to provide for up front “payment” of the bond premium.

If you can’t do it for prime bonds you can’t do it for subcontract bonds, either. 

Examples:  

you make the first progress payment for primes bonds. You report 0% progress. The contractor hasn’t stepped foot on site. No work has been accomplished. 

The contractor sets up numerous shops, site office trailers and runs temp power to them - its prep work. There is no mob line item (IMO there should have been one).You still report 0% progress.

The contractor starts bringing in piles of aggregate and sets up a batch plant for future concrete production for railroad trestle. It’s Prep work and stored material for aggregate.. There is no mob line item. (IMO, there should have been one).  You still report 0% progress. None of the in place required work has been started or accomplished. 

The job site is in Mississippi . The sub contractor in Vincennes Indiana buys two million dollars of steel before beginning fabricating sections of a railroad bridge that will be fabricated up in Indiana  You still report 0% progress on any bid items. 

You can make payment for all of these activities. However no permanent work has been accomplished yet on or off the site. 

I give up trying to explain this to you. We keep running in circles back to the beginning. 

Have a great Sunday.

ji, it suddenly occurred to me that you might not be familiar with  the format of the USACE ENG Form 93 For payment estimates.  I don’t have time today (Sunday) to do it but I will illustrate what one looks like, ASAP.  

The running balance of Contractor Bonds, stored materials etc. are reflected in the form outside of the reported progress on the CLINs. The balances shown reflect increases and decreases for those items.

As progress is shown under the CLINs, the amounts shown for items outside the CLINs are absorbed into the CLINs. Newly added stored materials will also be reflected in the balance for that.

joel hoffman said:

Prime contractor incurred cost for bond payments are not “work accomplished. “

I will restate what ji has stated, 52.232-5 has nothing, absolutely nothing to do with incurred costs, it has to do with "estimating" the amount of work.   Both the government and contractor agree to what "estimated" work has been accomplished and agree on invoice amount and payment is processed.

joel hoffman said:

Once the contractor earns progress on acceptable work performed

Come on Joel you are digging a horrible hole that does not reflect common practice in Federal construction contracting to try to defend a position you have taken about bonding .  You know full well "progress payments" can be made without acceptance of work and 52.232-5 at (h) and  FAR 52.246-12 Inspection of Construction supports this. A practice that has been around forever.

Your bias is based on USACE procedures - payment for sub bonds not allowed, automated formats and forms, etc..

Here is how I have experienced/assisted firms in processing payments for construction contracts with the USACE, USDA, HHS, FHA, DoD, and various other agencies in my 50+ year career.

Assumptions - Up front the contractor and government agreed after contract award at the prework conference that material would be delivered to site, agreed where it would be stored and agreed what the cost of pipe would be versus the installation cost of the pipe.  They agreed how it would be handled with regard to para. (b)(2) of the payment clause.  It was also agreed that as bonds were required and the contractor was also requiring bonds of the subs that payment in accord with para. (g) of the clause would be made out of the mobilization CLIN.

INVOICE  NO. 1 

 

 

 

 

 

 

 

 

 

 

CONTRACT

 

 

EARNED THIS PERIOD

 

TOTAL PAID

 

 

CLIN

DESCRIPTION

QTY/UNIT

UNIT PRICE

AMOUNT

QTY/UNIT

AMOUNT

QTY/UNIT

AMOUNT

 

1

Mobilization

1 LS

$1,000.00

$1,000.00

0

$500.00

0

$500.00

 

2

Sewer Pipe Install

FEET/500

$12.00

$6,000.00

0

$0.00

0

$0.00

 

2a

Sewer Pipe Delivered

FEET/500

$3.00

$3,000.00

500

$3,000.00

500

$3,000.00

 

2b

Sewer Pipe Installed

FEET/500

$3.00

$3,000.00

0

$0.00

0

$0.00

 

 

 

 

 

 

 

 

 

 

 

EXPLANATION AND REMARKS

 

 

 

 

 

 

 

 

For CLIN 1 this period the $500 is for bonds received and substantiated.

 

 

 

 

 

 

For CLIN 2 Delivered material payment based on invoice for materials delivered to site and confirmed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INVOICE NO. 2 

 

 

 

 

 

 

 

 

 

 

CONTRACT

 

 

EARNED THIS PERIOD

 

TOTAL PAID

 

 

CLIN

DESCRIPTION

QTY/UNIT

UNIT PRICE

AMOUNT

QTY/UNIT

AMOUNT

QTY/UNIT

AMOUNT

 

1

Mobilization

1 LS

$1,000.00

$1,000.00

1 LS

$500.00

1 LS

$1,000.00

 

2

Sewer Pipe Install

FEET/500

$12.00

$6,000.00

0

$0.00

100

$0.00

 

2a

Sewer Pipe Delivered

FEET/500

$3.00

$3,000.00

500

$3,000.00

500

$3,000.00

 

2b

Sewer Pipe Installed

FEET/500

$3.00

$3,000.00

100

$300.00

100

$300.00

 

 

 

 

 

 

 

 

 

 

 

EXPLANATION AND REMARKS

 

 

 

 

 

 

 

 

For CLIN 1 the contractor has completed mobilization to site.

 

 

 

 

 

 

For CLIN 2 Contractor has installed 100 feet of pipe.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INVOICE NO. 3 

 

 

 

 

 

 

 

 

 

 

CONTRACT

 

 

EARNED THIS PERIOD

 

TOTAL PAID

 

 

CLIN

DESCRIPTION

QTY/UNIT

UNIT PRICE

AMOUNT

QTY/UNIT

AMOUNT

QTY/UNIT

AMOUNT

 

1

Mobilization

1 LS

$1,000.00

$1,000.00

1 LS

$0.00

1 LS

$1,000.00

 

2

Sewer Pipe Install

FEET/500

$12.00

$6,000.00

0

$0.00

110

$0.00

 

2a

Sewer Pipe Delivered

FEET/500

$3.00

$3,000.00

500

$3,000.00

500

$3,000.00

 

2b

Sewer Pipe Installed

FEET/500

$3.00

$3,000.00

10

$30.00

110

$330.00

 

 

 

 

 

 

 

 

 

 

 

EXPLANATION AND REMARKS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For CLIN 2 additional 10 feet of pipe installed this period.

And here is how it would be done if there was only one CLIN.  Use your imagination for any other scenarios.

INVOICE NO. 1 

 

 

 

 

 

 

 

 

 

CONTRACT

 

 

EARNED THIS PERIOD

 

TOTAL PAID

 

CLIN

DESCRIPTION

QTY/UNIT

UNIT PRICE

AMOUNT

QTY/UNIT

AMOUNT

QTY/UNIT

AMOUNT

1

Sewer Pipe Install

FEET/500

$12.00

$6,000.00

0

$0.00

0

$0.00

1a

Sewer Pipe Delivered

FEET/500

$3.00

$3,000.00

500

$3,000.00

500

$3,000.00

1b

Sewer Pipe Installed

FEET/500

$3.00

$3,000.00

0

$0.00

0

$0.00

1c

Bond Reimbursement

 

 

 

 

 

 

$500

 

 

 

 

 

 

 

 

 

EXPLAN****ATION AND REMARKS

 

 

 

 

 

 

 

 CLIN 1 - Delivered material payment based on invoice for materials delivered to site and confirmed and $500 payment is for bond substantiated by contractor pursuant to FAR 52.232-5(g) as no other items in contract payment made from CLIN 1

On 9/22/2019 at 6:00 AM, joel hoffman said:

ji, it suddenly occurred to me that you might not be familiar with  the format of the USACE ENG Form 93 For payment estimates.  I don’t have time today (Sunday) to do it but I will illustrate what one looks like, ASAP.  

The running balance of Contractor Bonds, stored materials etc. are reflected in the form outside of the reported progress on the CLINs. The balances shown reflect increases and decreases for those items.

As progress is shown under the CLINs, the amounts shown for items outside the CLINs are absorbed into the CLINs. Newly added stored materials will also be reflected in the balance for that.

ji, I found the Mobile District Corps of Engineers implementing instructions for paragraph 5(e) of the ASPR Payments for Fixed Price Construction clause, which was in effect as of the date of the April 1980 policy directive. Paragraph 5(e) is now paragraph 5(g).

Earlier dated files with instructions and sample Pay Estimates that I found in a folder only mentioned separate lines for:

•mobilization and prepatory work if there was no separate bid items for those,  and

•stored materials. 

I found another document dated in late 1984, which referenced paragraph 5(e) of the newly effective FAR clause 52.232-5(e).

Both the 1980 and 1984 directives said to include  prime contractor bond payments as a separate line in the Engineer Form 93. That form has been the USACE payment format since at least as far back as the 1970’s.

Both instructions also said not to pay subcontract bonds.

The overall contract amount is shown on the first line of the ENG Form 93 with total percentage and dollars of work accomplished to date. This number came from pay estimate backup sheets broken down by bid item numbers and sometimes breakdowns of lump sum bid items by activities.

Below that first line were separate lines for:

•Materials on-site not incorporated into the work,

•off-site materials (only when specifically authorized in the contract) 

•mobilization and prep work (only for activities that couldn’t be directly associated with any bid item(s). 

•Payments for initial performance and payment bond premiums.

Below the bond premium was a line for reduction of the bond payment based upon the overall percentage complete of all bid items, which reflected that percentage of the bond premium. Thus, like stored materials, what is reduced there moves into earned progress of work accomplished.

The sum of all of the above was “total earnings to date”. 

The rest of the Form dealt with the math calculations for previous earnings, previous payments, previous retainage if any, any other deductions, etc. to reach the amount to be paid.

Upfront full payment for of Bond premiums were not “work accomplished”, which is covered under paragraph 5(b) of ASPR  and FAR clauses. They weren’t mobilization or prepatory work. 

All that was stated in the GAO decision. 

As an aside, the USACE progress payment procedures were refined, in great part, after a USACE Engineer Inspection General (EIG) inspection sometime during the 1970’.s. 

The EIG reported that the Corps (two Districts under two Divisions) weren’t  adequately assuring accuracy of and documenting the basis for civil works construction contract progress payments on the massive Tennessee-Tombigbee Waterway Project, which was a politically controversial program. The Mobile District Office instructions to the field in April 1980 said that the procedures would be uniformly applied to all Mobile District construction contracts, both Military and Civil funded. 

Those payment procedures, for the most part have been adopted across the South Atlantic Division and are also consistent with the Corps-wide contract administration Resident Management System (RMS) procedures. 

When I worked in Saudi Arabia in the mid 1980’s, The Middle East Division had essentially adopted the Mobile District CAB Manual, which I think we’re the first USACE detailed CAB manual procedures.  After I returned from overseas assignments  to the Mobile District HDQTRs, other Districts would ask for copies. We kept it up to date. In 1997, i moved to another Corps Division level office on a $24 billion Major DoD Level I Acquisition program, which had copied and adapted the Mobile CAB manual. 

The South Atlantic Division Districts, as Part of its ISO 9001 Certification process, adapted and updated the Mobile Manual for Division -wide use, as the basis for its standard operating procedures.  The SADDM is familiar to me from what was the SAM District Manual version that I had been responsible for revising and updating back in the 1990’s. 

Of course, the USACE  procedures aren’t government m-wide, but they have been used on well over $100 billion worth of construction contracts over the years.

joel hoffman said:

Of course, the USACE  procedures aren’t government m-wide, but

And so the answer is while USACE does not allow inclusion of subcontractor bonds in a bond premium reimbursement you have not found definitive support to the general statement that -

"...(T)he  contractor can’t request reimbursement for subcontractor bond costs under paragraph 5(g)."

In fact pursuant to the FAR such reimbursement may be and has been allowed at individual agency discreation.

Please private message me when you do as I think this thread has run its course.

C Culham said:

CIn fact pursuant to the FAR such reimbursement may be and has been allowed at individual agency discreation.

Yes such reimbursements have been allowed at individual agency discretion. Doesn’t mean that it may be or is lawful to do it pursuant to the FAR. 

You have conveniently overlooked, ignored  or taken out of context to misinterpret two very basic points made by the GAO in its decision. 

The GAO definitively explained why total reimbursement is allowed for prime contractor’s bonds that are required by law, not bonds required by bonding companies and/or by primes.

“Such reimbursements are not payments for future performance but are reimbursements to the contractor for his costs in providing a surety satisfactory to the Government as required by law, and therefore. are not prohibited by 31 U.S.C. I 529. Prior Comptroller General decisions clarified.”

The other point is that full payment refers to “when” the payment is allowed not “what” the payment is for. 

I read a 1978 report of the BRAB Committee, which included a critique review of the Study Group 13-C of the Commission on Government Procurement.  

The Study Group 13-C  recommendation No.5. was payment of the full premium of payment and performance bonds upon submission of evidence of receipted actual amount of payment to the surety versus  the practice of considering such premium as part of the contractor’s general overhead expenses on a prorata basis over the course of construction. 

The committee agreed with the recommendation and said it believed that the immediate payment of the bonds would be justified since the bonds would be obtained for the benefit of the government and the government would the full benefit of the bonds on the first day they go into effect 

The committee recommended revisions to the ASPR and FOR payment clause to provide for reimbursement of full payment of actual bond premiums in addition to material delivered and work performed  in the making of progress payments. 

“Full premium” meant not prorating over the course of the contract  The term “ full payment” had nothing to do with allowing immediate subcontractor bond reimbursement. 

https://books.google.com/books?id=-JMrAAAAYAAJ&pg=PA1&lpg=PA1&dq=Study+Group+13-C+of+the+Commission+on+Government+Procurement&source=bl&ots=_jdu3oCoD2&sig=ACfU3U2g7rBG0f4Hw5IW-Sra_ht1e2mnNA&hl=en&sa=X&ved=2ahUKEwjIgLXMsujkAhVihOAKHVtUBPIQ6AEwAHoECAMQAQ#v=onepage&q=Study Group 13-C of the Commission on Government Procurement&f=true

But, you can’t be convinced, so let’s leave it at that.

joel hoffman said:

But, you can’t be convinced, so let’s leave it at that.

Good Lord Joel! 

Neither the BRAB nor the GAO's decision was with regard to an interpretation of the Miller Act as applicable to the now FAR clause 52.232-5 specifically at (g).   Rather it was about whether a Federal contract could allow reimbursement for TOTAL BOND premiums to a contractor up front and not be considered an advance payment.  The GAO concluded the bonding cost for performance and payment bond could be reimbursed if appropriately stated in a contract clause.

Here is the factual read of the BRAB and GAO decision that you with USACE bias are overlooking that support the position that ALL, TOTAL, EVERY  performance and payment bond premium is addressed by GAO.

The BRAB report and page 21 recommendation No. 5 opening sentences is this.  Note that in no where in the continuing discussion is the Miller Act mentioned specifically.

“The issue here is not whether a contractor should be reimbursed for performance and payment  bond premiums but rather when he should be reimbursed.”

As to the GAO Decision and specifically the Digest and "Matter Of" I have already pointed out to you both address "TOTAL"  bond premiums.  To reinforce this view note this opening paragraph of the Decision and the emphasis I have added.  The GAO did not address only Miller Act bonds but all bonds.

“This decision is in response to an inquiry submitted by

Robert J. Robortory on behalf of the National Research Council,

Building Research Advisory Board, Standing Committee on Procurement

Policy (BRAB Committee), asking 'whether our Office would object to

revising the Armed.Services Procurement Regulations (ASPR) and the

Federal Procurement Regulations (FPR) to authorize the consideration

of paid performance bond and payment bond premiums in computing

progress payments under Government contracts.

MOST of the bonds in question are required pursuant to…..”

 PS - If premium reimbursement as I have noted is not allowed as you continue to state why does the USACE find it necessary to so state in its own policy?

“Corps of Engineers Bias”... probably true.

That is because the Chairman of the Committee 13-C that made the recommendation in 1972 was by a high level Army Corps of Engineers Headquarters official and the Federal Construction Council’s Standing Committee who reviewed and critiqued the 1972 report in 1977 for the OFPP also contained a Hqtrs USACE official. In fact, the Corps of Engineers was involved in the revision of the ASPR Payments clause. 

My former supervisor in Mobile District in the early 90’s was one of the high level inner circle of USACE Contract Administration policy officials and was in close contact and coordination with Hqtrs when policies were Developed and issued. Our Chief of Office of Council was in direct contact with HQTRS USACE Office of Council. 

In fact, essentially all HQTRs and lower Commands’ policies were and are coordinated between Contracting, Engineering, Construction and Office of Council before formal issuance. 

I kinda feel like they knew what the report and the GAO meant and definitely knew what the ASPR clause meant.

joel hoffman said:

“Corps of Engineers Bias”... probably true.

That is because the Chairman of the Committee 13-C that made the recommendation in 1972 was by a high level Army Corps of Engineers Headquarters official and the Federal Construction Council’s Standing Committee who reviewed and critiqued the 1972 report in 1977 for the OFPP also contained a Hqtrs USACE official. In fact, the Corps of Engineers was involved in the revision of the ASPR Payments clause. 

My former supervisor in Mobile District was one of the high level inner circle of USACE Contract Administration policy officials and was in close contact and coordination with Hqtrs when policies were Developed and issued. Our Chief of Office of Council was in direct contact with HQTRS USACE Office of Council. 

In fact, essentially all HQTRs and lower Commands’ policies were and are coordinated between Contracting, Engineering, Construction and Office of Council before formal issuance. 

I kinda feel like they knew what the report and the GAO meant and definitely knew what the ASPR clause meant.

Hear say IS NOT a substantive reference.  Give me one that is PLEASE!

I worked directly for and with the Hdqtrs level Policy makers, Carl. Once I found out who were on those committees and being very  familiar with the policy making system and coordination that goes on within DoD and with industry, I’m confident that the contract clauses for construction contracts are consistent with USACE policies that date back to the updated ASPR clauses and subsequent updates in FAR. The ASPR clauses were adopted into the DAR and subsequently, into the FAR.

I don’t really care one way or another how You administer construction contracts because I can’t do anything about it one way or the other. The people in USACE awarding and administering billions of dollars worth of construction contracts seem to know what they are doing for the most part. 

I worked with policy makers and even with the attorney in HQUSACE who was the Chairperson of the DAR 36 committee in the 1990’s. 

And USACE  are still coordinating within DoD , other major government agencies, Congressional committees and with industry.

You don’t appear to know how construction contract policy, related acquisition regulations or even the related legislation is formulated and vetted. I can assure you that the USACE is involved in the process.

I don’t really care if you don’t believe that.

Please delete this post. Thought I was texting my wife!

C Culham said:

PS - If premium reimbursement as I have noted is not allowed as you continue to state why does the USACE find it necessary to so state in its own policy?

USACE’s own policy dates back to when the ASPR clause was updated, so that people like you wouldn’t misinterpret it . April 1980 when it was new. People retire, newbies need policy procedural guidance, continuity and some traceability.

I didn’t write the policy. When my 1102 Contract specialist retired in the mid 1990’s, she gave me some file folders for historical internal District CAB policies. Some of the roots of which were traceable as far back as the 1960’s. 

I happened to notice that the bond reimbursement policy was issued the same month as when I joined the USACE in a field office for that District. Nine years later, I returned from overseas Districts to the Mobile District Headquarters to supervise CAB oversight for Construction Division and the District’s field offices, District construction contracting policy and guidance, new contract negotiations, changes,  claims, Terminations, other mods, A-E Liability investigations and determinations,  claims, District source selections, etc.

joel hoffman said:

so that people like you wouldn’t misinterpret it

Joel - Just to clarify my career in the Federal government started in 1972.  I again do not appreciate your unknowing prejudice and ask you to retract your "people like you" bias immediately as you see people like me have been successful acquisition professionals for many years.

Carl, If you began your Federal Government career in 1972, then you should have “substantive references” for your personal opinion about the 1979 or 1980 ASPR/FPR  revisions. You were working for the government then. 

You said you “weren’t so sure” on September 14th...and seem to have based your opinion upon “a close reading” of the clause at 52.232-5 and reading the GAO Decision and a non relevant GSBCA Appeal Decision.  

I started working on Air Force construction contracts in1971, including contract admin and negotiating mods to contracts, I took a four year hiatus after my five year commitment in 1976 to do other design work and construction contracting. Actually, I joined the Air Force in 1967, although it wasn’t in construction contracting.

I didn’t demand that you back up your opinion with substantive references and don’t really care. 

I do appreciate your contributions to WIFCON and thanks for your service. We just disagree on this particular topic.

On 9/18/2019 at 10:18 AM, ALAL said:

I don't think anyone has mentioned one thing that is possibly relevant to this discussion.  That is the definition of "Bond" in the FAR (at FAR 28.001).  It covers only bonds "executed by a bidder or contractor" and "a second party (the 'surety' or 'sureties') . . .." (Emphasis added.)  Therefore, bonds executed by a subcontractor would not be "bonds" for FAR purposes, and presumably not covered by FAR 52.232-5(g).

As for Don’s statement that the definition of performance bonds in Part 28 are not applicable to the bonds referred to in 52.232-5(g). , that is wrong. Clause 52.228-15,  Performance and Payment Bonds - Construction defines the contract requirements for performance and payment bonds. One must read the contract as a whole.

The clause at 52.232-5(g) is referring to the Payment Bond (Standard Form 25A) and Performance Bond (Standard Form 25) specifically required for the construction contract by contract clause 52.228-15   “Performance and Payment Bonds—Construction”. Co-insurance or reinsurance also pertain to those bonds when applicable.

-Nothing more and nothing less - unless the government requires additional, separate bonds in the solicitation and contract. 

52.232-5(g)

“(g) Reimbursement for bond premiums. In making these progress payments, the Government shall, upon request, reimburse the Contractor for the amount of premiums paid for performance and payment bonds (including coinsurance and reinsurance agreements, when applicable) after the Contractor has furnished evidence of full payment to the surety. The retainage provisions in paragraph (e) above shall not apply to that portion of progress payments attributable to bond premiums.”

52.232-5 is consistent with in harmonious with 52.228-15. 

The government is the obligee. 

Here is the performance bond form: https://www.gsa.gov/cdnstatic/SF25-16c.pdf?forceDownload=1

Note that the bond premium is listed on the performance bond. There is no separate premium for the payment bond. The cost generally covers both performance and payment bonds.

Subcontractor performance and/or payment bonds are commercial bonds and would rarely, if ever, be required by the government in the contract. 

Sorry that I didn’t remember that earlier. I don’t use my desktop anymore and don’t keep a printed set of the contract clauses. That the trouble with electronic contracts and particularly true for IBR (inclusion by reference).

Deleted

joel,

That's not how definitions work. A word or term used in one clause does not necessarily have the same meaning when used in a different clause because the two clauses are in the same contract.

You are ignoring the clear rule in FAR 1.108(a):

Quote

Words and terms. Definitions in part  2 apply to the entire regulation unless specifically defined in another part, subpart, section, provision, or clause. Words or terms defined in a specific part, subpart, section, provision, or clause have that meaning when used in that part, subpart, section, provision, or clause. Undefined words retain their common dictionary meaning.

Thus, the definition of "bond" at FAR 28.001 only applies to FAR part 28. If a contract contains the Definitions clause, then that definition extends to clauses prescribed in FAR part 28. FAR 52.232-5 is not prescribed in FAR part 28, so there's no basis for your assertion that the definition of "bond" at FAR 28.001 applies to FAR 52.232-5.

I think this thread is a good example of what can go wrong when we lack intellectual humility.

If you think that the clause at 52.232-5 isn’t referring to the performance and payment bonds required by the contract at 52.228.15, then this thread is an example of what can go wrong when we lack common sense! 

That clause refers to progress and final payments for all of the contract performance requirements.

joel hoffman said:

If you think that the clause at 52.232-5 isn’t referring to the performance and payment bonds required by the contract at 52.228.15, then this thread is an example of what can go wrong when we lack common sense! 

That clause refers to progress and final payments for all of the contract performance requirements.

That does not make the definition at FAR 28.001 applicable to FAR 52.232-5. Try again.

On 9/26/2019 at 11:03 AM, joel hoffman said:

As for Don’s statement that the definition of performance bonds in Part 28 are not applicable to the bonds referred to in 52.232-5(g). , that is wrong. Clause 52.228-15,  Performance and Payment Bonds - Construction defines the contract requirements for performance and payment bonds. One must read the contract as a whole.

The clause at 52.232-5(g) is referring to the Payment Bond (Standard Form 25A) and Performance Bond (Standard Form 25) specifically required for the construction contract by contract clause 52.228-15   “Performance and Payment Bonds—Construction”. Co-insurance or reinsurance also pertain to those bonds when applicable.

-Nothing more and nothing less - unless the government requires additional, separate bonds in the solicitation and contract. 

52.232-5(g)

“(g) Reimbursement for bond premiums. In making these progress payments, the Government shall, upon request, reimburse the Contractor for the amount of premiums paid for performance and payment bonds (including coinsurance and reinsurance agreements, when applicable) after the Contractor has furnished evidence of full payment to the surety. The retainage provisions in paragraph (e) above shall not apply to that portion of progress payments attributable to bond premiums.”

52.232-5 is consistent with in harmonious with 52.228-15. 

The government is the obligee. 

Here is the performance bond form: https://www.gsa.gov/cdnstatic/SF25-16c.pdf?forceDownload=1

Note that the bond premium is listed on the performance bond. There is no separate premium for the payment bond. The cost generally covers both performance and payment bonds.

Subcontractor performance and/or payment bonds are commercial bonds and would rarely, if ever, be required by the government in the contract. 

Sorry that I didn’t remember that earlier. I don’t use my desktop anymore and don’t keep a printed set of the contract clauses. That the trouble with electronic contracts and particularly true for IBR (inclusion by reference).

The bond requirements for the contract are defined in the clause at 52.228-15, and  the specific forms to use. 

Generally, the government doesn’t require any other  payment and performance bonds in the solicitation and contract. 

“28.000   Scope of part.

This part prescribes requirements for obtaining financial protection against losses under contracts that result from the use of the sealed bid or negotiated methods. It covers bid guarantees, bonds, alternative payment protections, security for bonds, and insurance.”

“28.102-3   Contract clauses.

(a) Insert a clause substantially the same as the clause at 52.228-15, Performance and Payment Bonds—Construction, in solicitations and contracts for construction that contain a requirement for performance and payment bonds if the resultant contract is expected to exceed $150,000. The contracting officer may revise paragraphs (b)(1) and/or (b)(2) of the clause to establish a lower percentage in accordance with 28.102-2(b). If the provision at 52.228-1 is not included in the solicitation, the contracting officer must set a period of time for return of executed bonds.”

The clause at 52.228-15 implements the requirements of FAR 28. 

Paragraph (g) in the payments clause at 52.228-5 states that the government will reimburse the contractor for the paid premiums for the performance and payment bonds. 

——————————-

Edit:  I sense that it is very difficult for some here to be able to use inferential thinking skills to understand that the performance and payment bonds described and required by said clause 52.228-5 meet the definitions in 28.001 for bonds, performance bonds and for payment bonds. 

And since there is no other requirement in the contract for additional performance and/or payment bonds, paragraph (g) refers to the only performance and payment bond requirement in the contract.

——————————

If the contract requires other payment and performance bonds then the paragraph (g) would also cover that.

On ‎9‎/‎27‎/‎2019 at 3:24 AM, joel hoffman said:

The bond requirements for the contract are defined in the clause at 52.228-15, and  the specific forms to use.

The bond requirements for the contract are defined in the clause at 52.228-15, and  the specific forms to use.

Bonding guiding uniform policies and procedures for acquisitions are provided for in the FAR.  The policies and procedures provide for allowable and allocable pricing of all bonds and for the payment/reimbursement of said bonds to a contractor. No specific strategy, practice, policy or procedure in the dictates in the FAR that they cannot  be.  If it is in the best interests of the Government and therefore not addressed in the FAR, nor prohibited by law (statute or case law), Executive order or other regulation, that the strategy, practice, policy or procedure of reimbursement of a contractor for subcontractor bonds is a permissible exercise of authority.

Period!

On 9/27/2019 at 5:24 AM, joel hoffman said:

The bond requirements for the contract are defined in the clause at 52.228-15, and  the specific forms to use. 

Generally, the government doesn’t require any other  payment and performance bonds in the solicitation and contract.

True statement. Fact.

On 9/27/2019 at 5:24 AM, joel hoffman said:

And since there is no other requirement in the contract for additional performance and/or payment bonds, paragraph (g) [of 52.228-5 ] refers to the only performance and payment bond requirements in the contract.

——————————

If the contract requires other payment and performance bonds then the paragraph (g) would also cover that.

Other bonds not contractually required but only required by prime for subs,  which don’t protect the interests of the government as an obliges,  may be allowable in a negotiated contract. They would also be part of the contract cost in a competitive acquisition.

However such premiums  are calculated as an indirect cost, based upon the net price of the subcontract. As such they would be reimbursed on a prorata basis as the subcontract work is performed. 

It’s  not in the best interests of the government to reimburse non-required bond costs upfront that are spread over the cost of the subcontract and that are prime contractor required to protect the financial interests of the prime contractor and its bonding company. The government has no need for such bonds.

That’s consistent with the GAO interpretation of the law generally prohibiting advance payment before earned progress.

But I don’t care how Carl personally does it as I don’t have any control over it.

joel hoffman said:

However such premiums  are calculated as an indirect cost,

Not a factual statement.  The uniform policies and procedures of the FAR Part 31 DONOT provide  that bonding costs of subcontractors shall be either an indirect cost or direct cost.   Such determination is left to the accounting practices of the particular firm.

Further, indirect/direct cost has no bearing on payment for bonds, either primes or subcontractors.  By example consider this.   Sealed bid firm fixed priced contract the Government does not know how or where in the contractors pricing scheme that they placed bond costs, for either bonds required by the government of the prime or those of the prime required of subcontractors.   They might be direct or indirect who knows.   The prime shall be reimbursed for the amount of bond premiums for performance and payment bonds after the Contractor has furnished evidence of full payment to the surety.  

joel hoffman said:

It’s  not in the best interests of the government to reimburse non-required bond costs upfront that are spread over the cost of the subcontract

Not a factual statement.  Best interest of the government would have already been determined by placement of 52.232-5(g) specifically in a contract.

joel hoffman said:

That’s consistent with the GAO interpretation of the law generally prohibiting advance payment before earned progress.

 Not a factual statement.   The GAO's interpretation of law regarding payment and  bond premiums is that they agree that reimbursement of full bond premiums is allowable if the contract so provides for such payment and the contractor has earned the payment by substantiation of providing the bonds.  Just as the contractor earns the right for payment for material delivered to site regardless of who has brought the material to the site, subcontractor or prime.

Since you still don't understand what they meant by "full payment", there is no further use discussing this.

On 9/26/2019 at 11:35 AM, Don Mansfield said:

joel,

That's not how definitions work. A word or term used in one clause does not necessarily have the same meaning when used in a different clause because the two clauses are in the same contract.

You are ignoring the clear rule in FAR 1.108(a):

Thus, the definition of "bond" at FAR 28.001 only applies to FAR part 28. If a contract contains the Definitions clause, then that definition extends to clauses prescribed in FAR part 28. FAR 52.232-5 is not prescribed in FAR part 28, so there's no basis for your assertion that the definition of "bond" at FAR 28.001 applies to FAR 52.232-5.

I think this thread is a good example of what can go wrong when we lack intellectual humility.

Don, the contract specifically defines the requirements for performance and payment bonds. One doesn't have to refer back to FAR definitions. 

If there is no mention of discretionary performance bonds covering subcontractor default in the contract, it wont be read into the contract requirements..

"[A] writing is is interpreted as a whole, and all writings that are a part of the same transaction are interpreted together, Restatement, Second, Contracts Section 202(2)."Since language derives its meaning largely from the context in which it appears, an attempt to interpret a word, term, or clause independent of the remainder of the contract document may distort its meaning and thus not accurately reflect the intent of the parties."**

**See "Analysis of Contract Language of Contract Documents" in Chapter 2, CONTRACT INTERPRETATION, (my latest is the Fourth Edition (2006) of the Book Administration of Government Contracts by Cibinic, Nash and Nagle.

Some more excerpts below:

•  "One must interpret the contract as a whole to avoid conflict. Preference is given to an interpretation of a contract which accords reasonable meaning to each of its provisions...Thus , a court or board will will look for an interpretation that avoids contract language ambiguous"

The book cites a court decision in Wunschel & Small, Inc.v. United States, 1 Cl. Ct. 485 (1982), aff'd, 714 F.2d 161 (Fed. Cir. 19830).

• The court "read two clauses together and found that the contract evinced a single intent of the parties."

It also cited an Engineer Board of Contract Appeals (combined with the ASBCA in 2000) Decision involving discretionary subcontractor bonds.

• [in] Lane Constr. Corp., ENGBCA 5880, 93-1 BCA Section 25,448. "[T]he contractor alleged that it was entitled to reimbursement for payments it made for discretionary performance bonds covering subcontractor default under a contract line item containing a "not to exceed" amount for performance and payment bonds. The board denied the appeal, holding that, reading the contract as a whole, the line item only applied to bonds required under the Miller Act."

I don't have subscriptions to legal search services, so wasn't able to find the ENG Board decision to read it. I will have to drive downtown to the local USACE Law library to read it.

joel hoffman said:

Since you still don't understand what they meant by "full payment", there is no further use discussing this.

Joel – It is you that does not understand and has, in my view, so convoluted the matter of payment for bonds that you have presented a stance that is not supported in fact.

You now bring in the issue of a definition or understanding of “full payment” and it is you, not me, who should have good understanding,  that has turned yourself into a hole.

To this point and your most current statement as quoted above you have made the following points but never, yourself brought up a need for understanding “full payment” until now. Wording that I might add has no bearing on the issue at conflict, payment of subcontractor bond premiums in a request for payment made by a prime.  Specifically you have said the following in this thread about “full payment”.

“The other point is that full payment refers to “when” the payment is allowed not “what” the payment is for.” 

“The term “ full payment” had nothing to do with allowing immediate subcontractor bond reimbursement”

“The other point is that full payment refers to “when” the payment is allowed not “what” the payment is for.”

So let’s one more time dissect the 52.232-5(g).

It says this –“Reimbursement for bond premiums. In making these progress payments, the Government shall, upon request, reimburse the Contractor for the amount of premiums paid for performance and payment bonds (including coinsurance and reinsurance agreements, when applicable) after the Contractor has furnished evidence of full payment to the surety. The retainage provisions in paragraph (e) of this clause shall not apply to that portion of progress payments attributable to bond premiums.”

In the context of this part of the FAR clause you are correct about the when and not the what in that a contractor can be paid for regarding performance and payment bonds upon providing evidence that all bond premiums have been paid.

So here is my example. 

Sealed Bid FFP. Contract awarded. No separate CLIN for mobilization or bonding just four CLINS that are for painting the outside of 4 huge buildings that are priced lump sum for each building.  The CLINS in total equal $250.000.00 .  The contractor after award at the post award orientation meeting submits to the government a request for payment of $7,000.00 for Bond Premiums. At this point no work has begun on the facilities.  Evidence attached to the invoice includes 3 receipts from 3 separate sureties that state they are receipts for the “full payment” of performance and payment bonds.  One receipt is addressed to the prime, the 2 other are addressed to first tier subcontractors.

In this example the government would first do verification of the bonds such as request the contractor to provide the originals of the primes bonds and copies of the subs bonds or whatever other verification the government elects to use.

Upon verification the government would make payment on a form (that might even look something like a ENG 93) and that form would look like this along with the annotation in the description/notes section of the form that the payment is for “bond premiums” –

                                                CONTRACT                                                                           PAYMENT THIS PERIOD

ITEM NO.                DESCRIPT.             QTY/UNIT               UNIT PRICE           AMT                        QTY/UNIT               AMT

1                              BLDG 1   1 LS                         $50,000.00              $50,000.00                             0              LS            $7,000.00

2                              BLDG      1 LS                         $100,000.00            $100,000.00                            0              LS            $0.00

3                              BLDG      1 LS                         $75,000.00              $75,000.00                              0              LS            $0.00

3                              BLDG      1 LS                         $25,000.00              $25,000.00                              0              LS            $0.00

                                                                                                                                                TOTAL PAYMENT $7,000.00

This example demonstrates what “full payment” is and how it is handled to pay a prime contractor. 

Your argument about this example is not that the amount of $7,000 could be paid if it was ONLY the primes bonding but that it could not be paid because it includes subs bonding as well.  

As I have pointed out repeatedly neither the clause nor a definitive FAR reference, nor case law, supports not making  the payment to a prime for bond premiums that include subcontractor bond premiums (fully evidenced).   In support of my view I have repeatedly pointed to the clause which makes no delineation and provides no definition of what bond premiums can or cannot be paid for, supported that bond premiums of a subcontractor are allowable costs in a government contract, and offered, exacting references that show that prime contractors do get subcontractor bonding and provided a GSBCA case that clearly points out that a government prime contractor submitted an invoice that included sub bonding in a payment request and was paid and that demonstrates that payments are in fact made to the prime for such costs.

I agree no further discussion is needed because of your lack of understanding and clear reading of a FAR clause and supporting factual references.

@joel hoffman,

Nothing you posted proves that the definition of "bond" at FAR 28.001 is the applicable definition when that word is used at FAR 52.232-5(g). You continue to ignore FAR 1.108(a) and the Definitions clause. The Definitions clause specifically makes the definitions at FAR 28.001 applicable to clauses prescribed in FAR part 28--not other clauses prescribed in other parts (like FAR part 32). You continue to write that contracts must be read as a whole, but your reading excludes the Definitions clause.

argument from authority

Examples:

when I was at this agency four score ago,

in my experience,

when I was running things,

when I signed the big contracts,

from my professional expertise,

when I rebuilt the Panama Canal,

after modifying eight million contracts,

back when I knew that famous guy,

from negotiating with the big boys I learned,

just like this guy told me on the phone

Spent the afternoon at the County Law Library researching some cases in Lexis.

On 27 Oct 1978, the DAR Council approved the recommendations to change DAR 7-602.7 payments to add new 7-602.7(e) to allow the entire amount of the premiums for Miller Act performance and payment bonds in lieu of prorating in progress payments upon evidence of paid premiums. 

Both the ASPR and FPR payment clauses were modified- to specifically allow upfront payments for the Miller Act payment bonds required under the contract. 

The modified FPR payments to Contractor Clause was adopted in June 1979. It redesignated former paragraph (e) as (f) and added new paragraph (e) :

“(e) If Miller Act (40 USC 270a-270e) performance or payment bonds are required under this contract, the Government shall pay to the Contractor the total premiums paid by the contractor to obtain the bonds. This payment shall be made at one time to the Contractor together with the first progress payment otherwise due after the Contractor has (1) furnished the bonds (including coinsurance and reinsurance agreements when applicable), (2) furnished evidence of full payment to the surety company, and  (3) submitted a request for such payment. The payment by the Government to the Contractor of the bond premium shall not be paid as increments of the individual progress payments and shall not be in addition to the contract price.”

The above was footnote number 5 to the Appeal of Reese Industries, 83-1 BCA P 16245 (Dec 22, 1982). The Appeal was in response to KO Decisions on five separate Air Force construction contracts. The body of the decision noted that both ASPR and FPR clauses were similar but only quoted the language of the FPR clause. 

The ASPR clause was ASPR 7-602.7 with new paragraph (e). 

The ASPR clause was later updated to use the current wording in paragraph (g) (then paragraph (e)) of the Payment clause.  

So the DAR and FPR committees “amended” the payment clauses to provide   for upfront one time payment of “total” premiums of Miller Act Bonds when required by the contract. The initial amendment did not allow for payment of the bond premium as increments of individual progress payments and was not in addition to the contract price. 

The gist of the five ASBCA claims appeals by the contractor was that it had not included the cost of the bonds in the contract price, did not read the clause that was in the five different contracts and had never been bonded before these contracts. It thought that it could be reimbursed for the bond premium in addition to the contract price. I noted  that the contract payment clause was included by reference, not directly included in the body of the solicitation.

Another reason why I don’t like clauses IBR. 

The appeals were denied. 

I mentioned this Decision because it included the language of the new clause(s) that resulted from the 1972 Committee 13-C recommendation, which slowly worked its way through various reviews, the 1977 GAO Decision previously discussed , more committees and finally into the clauses.

AND it was only applicable to Miller Act Bonds when required by the contract. 

———————————————

Tomorrow, if I find the time, I will add another post concerning the Corps of Engineers Board of Contract Appeals Decision in the Appeal of The Lane Construction Corp, dated September 21, 1992. 93-1 BCA P 25448 , ENGBCA No. 5880, 1992 WL 246119. 

The ENGBCA was combined with the ASBCA in 2000 due to government reorganization of Appeals Boards for cost cutting reasons. 

The Decision is cited in the 2006 4th Edition of Administration of Government Contracts, as I mentioned this morning. 

_“_Contract Interpretation —Subcontractor Bond Costs — In a fixed price contract, the unit price schedule providing for reimbursement of the contractor for its actual bond premiums [priced on the basis of “Not to Exceed”] when read in harmony with other applicable contract provisions included reimbursement for the actual bond premiums paid for required Miller Act performance and payment bonds purchased for the protection of the United States but not for the actual premiums for the purchase of performance and payment bonds for the prime contractor's protection. “

Paragraph (g) of the payments clause in that contract used the same language as the current clause. 

The case is complex but the Board did state that paragraph (g) is applicable to bonds required by the contract...

More details tomorrow or as soon as time permits.

Don Mansfield said:

@joel hoffman,

Nothing you posted proves that the definition of "bond" at FAR 28.001 is the applicable definition when that word is used at FAR 52.232-5(g). You continue to ignore FAR 1.108(a) and the Definitions clause. The Definitions clause specifically makes the definitions at FAR 28.001 applicable to clauses prescribed in FAR part 28--not other clauses prescribed in other parts (like FAR part 32). You continue to write that contracts must be read as a whole, but your reading excludes the Definitions clause.

Well, Don,  the Board decisions didn’t  agree with you that the performance and payment bonds mentioned in the Payments clause aren’t the Miller Act Bonds required by the contract. There were no other bonds required by the involved contracts . 

And Nash and Cibinic apparently didn’t, either in the contract interpretation section that I mentioned. 

Since you are a Professor, you probably have access to both the book and Lexis to read the decisions cited in Administration of Government Contracts. The decisions include other citations, some of which are pertinent.

while we are at it, the Definitions clause isn’t applicable because the word or term isn’t defined in Part 2 nor is it  “defined” in 52.232-5 separately from the specific requirements in 52.228-15 or elsewhere in the contract, if applicable..

 Thus, when there are no other required bonds, the performance and payment bonds refer to the MillerAct bonds (SF 25 and SF 25a), whether they be from individual sureties or acceptable Corpoate Sureties.

Joel - An actual link to the specific decisions you note would be appreciated.  As you have implied throughout this thread with regard to me your interpretation of a board case is yours and without substantiation of the contents of the decisions you have cited I have trouble accepting your one man read.

joel hoffman said:

Well, Don,  the Board decisions didn’t  agree with you that the performance and payment bonds mentioned in the Payments clause aren’t the Miller Act Bonds required by the contract. There were no other bonds required by the involved contracts . 

And Nash and Cibinic apparently didn’t, either in the contract interpretation section that I mentioned. 

Since you are a Professor, you probably have access to both the book and Lexis to read the decisions cited in Administration of Government Contracts. The decisions include other citations, some of which are pertinent.

while we are at it, the Definitions clause isn’t applicable because the word or term isn’t defined in Part 2 nor is it  “defined” in 52.232-5 separately from the specific requirements in 52.228-15 or elsewhere in the contract, if applicable..

 Thus, when there are no other required bonds, the performance and payment bonds refer to the MillerAct bonds (SF 25 and SF 25a), whether they be from individual sureties or acceptable Corpoate Sureties.

@joel hoffman, 

Nothing that you've cited dealt with the issue of whether the definition of "bond" at FAR 28.001 is the applicable definition for interpreting "bond" as used in FAR 52.232-5(g). In that respect, your citations are inapposite.

Carl, there is no “link to the specific decisions” that I noted. They are available in hardbound copies of the referenced BCA’s or available through WESTLAW, LEXIS,  or other subscription based legal services. I visited the Mobile County Law Library yesterday upon learning that the Mobile District Corps of Engineers had disposed of all their hard copy legal references plus it was year end for them. 

I used the Law Library’s WESTLAW service. I was able to print out a six page hard copy of the Appeal of the Lane Construction Corp ENGBCA , which was cited in the 2006 Fourth edition of Administration of Government Contracts. In  WESTLAW It is cited as WL case number 246119.  It is found in 93-1 BCA P 25448 (ENGBCA No. 5880, 1992.

 I was also able to print out a couple pages of the Reese Industries Appeal of 5 Air Force contract KO Decisions , That case is in 83-1 BCA P 16245 (ASBCA) . The pages I printed contained the wording of the June 1979 FPR amendment to the Payments clause, ensuing from the 1972 Committee 13-C recommendation that went through other reviews including the 1977 GAO decision that we have debated. The amended clause inserted the new paragraph (e) (now (g) in the current clause)  at 52.232-5. I quoted it last night to show that it specifically limited upfront reimbursement to the Miller Act required bonds for the protection of the Government. It did not, as y’all have insisted, provide for upfront reimbursement of subcontract bonds. 

You may purchase a copy of Administration of Government Contracts. I bought two editions myself and my office bought one edition. Your office should purchase one if you don’t have it. It’s available at some College Bookstores or order on-line. 

—————————————

Regarding the Lane Construction Corp. Appeal. The clause at 52.228-15 wasn’t in the FAR until Sep 2005. My 1 January 1996 version instructs the government to specify in the solicitation (a) The requirements for the (performance and payment) bond(s) (exceeding $25k then) ; (b) The penal sum of each bond ; and (c) The deadline for submitting acceptable bonds.

Note that the SF 1442 includes three references to the required bonds at blocks 12A. ,  12B, and 18. 

Information for Bidders IB-9 provided this information, including the Standard Forms 25 and 25A.  

The Pittsburgh District included Line item No. 0001 for Reimbursement for Actual Performance and Payment Bond PREMIUMS (See Special Clause SC- 19) .    Unit Price:  NOT TO EXCEED.    AMOUNT _-_-_-_.   Lane bid $450,000. 

SC-19 “Payment for Performance and Payment Bonds” stated in “pertinent part” that “The requirement For performance and payment bonds is applicable only two bids of $25,000 or more.

“a. Paragraph (g)  of the contract clause entitled “payments under fixed price construction contracts quote provides for reimbursement of premiums paid to the surety or sureties for performance and payment bond. In order to ensure sufficient funds have been set-aside for payment of such premiums, bitter shall insert in bid item number 1 an appropriate not to exceed dollar amount. Failure of bidders to insert a not to exceed dollar amount in bid item number 1 will cause the bid to be rejected as non-responsive.”

“b. Not withstanding the contract clause and titled “payments under fixed price construction contracts,” the contractor shall not be reimbursed an amount which exceeds the dollar amount set forth in bid item number 1”

“Contract General Provision number 54, referred to in SC- 19 (a) , was 52.232-5 (APR 1989) with the paragraph (g) language. 

“Lane Paid a total of $452,321In premiums to sureties for various performance and payment bond. Of this title, the core of engineers reimbursed the lane pursuant to item 1 for its actual premiums in the amount of $399,628 for required Miller act performance and payment bond issued for the protection of the United States as Obligee with Lane named as the principal.”

” Lane paid $52,693 to purchase a subcontractor labor and material bond and a subcontractor performance bond indemnifying Lane as the obligee against default by its major subcontractor[ ]. Lane’s corporate practice is to require coverage of a major subcontractor by a subcontractor performance and payment bond issued for lands protection, if Lane has not had substantial experience with that subcontractor. “

 The subcontract performance and payment bond applied solely to performance of work under this contract by [its subcontractor]. Although Lane required [the subcontractor| to obtain these bonds, Lane paid the premiums directly to the surety. The payment to the surety was in addition to the subcontract price.

“Lane requested the Corps of engineers to reimburse it under item number one for the actual premiums for (its subcontractor) bonds in the amount of $50,372. This amount represents the difference between the not to exceed amount of $450,000 and the amount of $399,628 that the Corps  paid lane for the required Miller at performance and payment bond is for the United States is protection. The Corps  denied Lane’s request. “

( to be continued  . Sorry but I have to go to my wife’s volleyball team’s match.  While the direct subject of the claim is whether the contractor could be reimbursed for the subcontract bonds under bid item number one, it raised the interpretation of paragraph (g) in clause 52.232-5 and other reasons. I will explain ASAP. )

Okay Joel – BUT before you go on and on about how you read the cases I think you will find the following case to be very important with regard to your citation of the Lane and Reese. 

You see specifics matter and I again state that your statement    “However,  buonamma is correct that the contractor can’t request reimbursement for subcontractor bond costs under paragraph 5(g). Those costs must be liquidated/amortized/recovered/spread over progress payments for the work performed by those applicable subs.”  is a statement that is “not correct.”   Rather facts support determination of what can be reimbursed as “bond premiums” is determined on the facts of specific contract .

Specifically I provide the following reference and quotes…..

http://www.asbca.mil/Decisions/2000/52889.pdf

“…Subparagraph (a) of the PAYMENTS clause obligated the Government to pay the

amount established in the contract as the fixed price, which was determined by the parties’mutual agreement to be the specific sums contained in Bean Stuyvesant’s sealed bid. That bid was prepared in accordance with the contract’s Bidding Schedule, which required CLIN 0007 BOND COSTS to be bid as a flat sum to “include the Cost of Bid Bond, Performance and Payment Bonds.” 1 Specific project requirements paragraph 17 reinforced the nature of the Government’s obligation by stating “[P]ayment for Bond Cost will be made pursuant to contract lump sum price as stated in the Bidding Schedule.”The Government’s attempted reliance upon subparagraph (g) of the PAYMENTS clause to limit Bean Stuyvesant’s recovery to reimbursement for bond premiums is misplaced. The language in subparagraph (g) has been interpreted repeatedly to be procedural in nature, giving the contractor the option of receiving reimbursements for performance and payment bond premiums as part of progress payments. That portion of the PAYMENTS clause only describes “methods and procedures by which [repayment of bond premiums] will be made and [has] no bearing on the contract price which is identified elsewhere in the contract.” Reese Industries, ASBCA Nos. 25862 et al., 83-1 BCA 16,245 at 80,744, discussing a predecessor version of FAR 52.232-5(g) and citing

RESTATEMENT CONTRACTS § 230; see also Spickard Enterprises, Inc., ENGBCA No.

4509, 81-1 BCA ¶ 14,878 and Moulder Bros., ASBCA No. 31769, 86-3 BCA ¶ 19,297.

Subparagraph (g) does not confer entitlement upon a contractor for the reimbursement of

bond premiums, nor does it restrict the contractor’s right to recover the lump sum bid as

bond costs.

1This appeal is distinguished from two decisions relied upon by the Government. In both D&J Construction, Inc., ENGBCA No. 5291, 88-2 BCA ¶ 20,678 and The Lane Construction Corp., ENGBCA No. 5880, 93-1 BCA ¶ 25,448, the Government included language in the bidding schedule restricting bond costs to reimbursement for actual bond premiums paid. Such language was not used in the instant bidding schedule.

In addition to the PAYMENTS clause, the Government also argues it restricted the

contractor’s recovery of bond costs to reimbursement for premiums by including an

excerpt from a Corps of Engineers’ acquisition regulation, intended for use with a

superseded DFARS clause, in paragraph 29 of the instructions to bidders. That instruction

was not part of the contract, and cannot change the plain meaning of the bidding schedule, especially where all other contract terms support the contentions of Bean Stuyvesant.

Using standard procurement clauses from the FAR and DFARS, the Government

established a fixed-price construction contract and agreed to pay the price provided in the

contract. The contract price was based upon the Bidding Schedule, in which Bean

Stuyvesant submitted $275,000 as bond costs which it asserts included “indirect costs”

associated with creating and maintaining its bonding capacity. Subsequent to award the

Government attempted to reduce the agreed-upon sum for bonds to only the expenses of

bond premiums. This would convert one element of the fixed-price construction contract

into a cost-reimbursable item, which was inconsistent with the contract’s terms. The

Government is obligated under the contract to pay the full amount included as CLIN 0007 BOND COSTS. Although the Government argues that the amount is excessive and cannot be substantiated under even a broad reading of “all costs” as described in DFARS 252.236-7008, the Government’s protestations come too late. …”

Lane Construction Corp. continued...

Lane filed a certified claim on December 20, 1990, requesting the KO to reimburse Lane under line item 1 for the subcontractor performance and payment bonds in the amount of $50,372. The KO denied the claim and Lane filed a timely appeal. 

The Decision:

The parties filed motions for summary judgement raising the question of whether Lane is entitled to reimbursement under Line Item number1.  The question was whether line item 1 covered reimbursement of Lane for its actual costs to purchase discretionary subcontract bonds for Lane’s protection. 

The Corps contended that the contract requires it to reimburse Lane under Item 1 only for the actual premiums paid by Lane for the required Miller Act bonds. Lane contended that Item 1, reasonably interpreted, expressed the Corps’ agreement to reimburse Lane for all of its actual bond premiums up to the not-to-exceed amount bid., including the subcontract bonds.

Resolution of the parties’ respective motions rest in part on the meaning reasonably ascribed to the language of line item 1 stating that,  “[r]eimbursement for actual performance and payment bond premiums (See SC-19.).”

(I am omitting the multiple case citations herein) Contract provisions are interpreted according to their plain, ordinary meaning in the first instance with all provisions considered and read together. Here, we need to determine the objective meaning reasonably applicable to item 1 in the context of all relevant contract provisions read as a whole, giving the contract words their plain and ordinary meeting and considering the contract’s purpose. In this regard, shorthand language used in a bid schedule to describe contract work necessarily does not define the parties’ obligations in great detail. This is the function of the contract’s clauses,  specifications and drawings.

However, when item 1 is considered in conjunction with the contract provisions regarding performance and payment bond, it’s meaning is plain. The parties agreed that the Corps would reimburse Lane for the actual premiums Lane paid to purchase required Miller Act performance and payment bonds up to the not-to-exceed amount Lane inserted in item one of its bid. 

The parties did not agree under item 1 that the Corps  would reimburse Lane for the actual cost for bonds Lane purchased at its discretion to protect it from the subcontractors the faults in contract performance and payment.

In this regard, item one refers to SC – 19.   SC-19 In its title states that it involves “the requirement for bonds” for contracts over $25,000 and directs bidders to place an item 1 an appropriate, not-to-exceed amount in compliance with this requirement. The cross-references back-and-forth between SC 19 and Item 1 reasonably put  bidders on notice that item 1 and SC 19 concern “the requirements for Bonds” under the contract, although SC 19 does not otherwise define the nature of “the requirement”.

Although SC-19 itself does not define what is meant by the reference in its title to “the requirement for bonds“, one may readily determine its intended scope by considering related contract provisions.  IB –9, by its reference to Standard Form 25 and standard form 25A, respectively, specifies the requirement for Miller Act performance and payment bonds for contracts exceeding $25,000. Lane agrees [in its Opposition to the Corps’ Motion for summary judgement and Lane’s cross-motion for summary judgement] that IB-9 bound it to provide required Miller Act performance and payment bonds. 

In this regard, both SC-19 and IB -9 are strikingly similar terms in referring to “the requirement for bonds.” SC-19 is entitled “payment for performance and payment bonds. The requirement for performance and payment bonds is applicable only to bids of $25,000 or more.” IB-9 is entitled, “Performance and payment bonds. This requirement is applicable only to bids of $25,000 or more.”

Here, the wording of Item 1 when read in harmony with other relevant contract provisions, i.e. IB-9 and SC 19, expressly applied only to required Miller Act bonds. As referenced by item 1, SC 19 plainly applied only to “the requirement” for performance and payment bond in contracts over $25,000. In this regard, upon seeing the reference in Item 1 to SC 19, which referred to “the requirement” for bonds, Lane assumed any risk of failing to inquire about the scope of Item one, if it was confused about these reasonably clear provisions.

Lane raises several issues in argument which we address briefly. 

Lane maintains that general provision GP-54 supplies the contractual basis for reimbursement for the premium costs for the subcontractor bonds. However, that provision merely provides methods and procedures for the payment of progress payments and, in conjunction there with, payment on a lump sum basis for performance and payment bond premiums where there is an otherwise underlying contractual obligation to pay such costs. See Reese Industries, ASBCA No. 25862, et seq.,[there were 5 identical claims on 5 Air Force contracts] 83-1 BCA (section) 16,245; Spickard Enterprises, Inc., ENGBCA No’s. 4509, 4510 , 81-1 BCA (section) 14,878. A search of the contract documents does not reveal any provision, and none has been called to our attention, directly imparting a Corps agreement to reimburse Lane for its purchase of subcontractor bonds for its own protection.Thus, general provision 54 when read in conjunction with item 1, SC 19, and IB-9 does not provide contractual authority establishing that the Corps agreed under item 1 to reimburse Lane for its actual premiums for the subcontractor or bonds, which were not required bonds.

[Lane’s remaining arguments concern whether or not subcontract bond premiums are allowable costs under the contract. The board agreed that subcontractor bond cost may be included in the contract price, However nothing in the argument would indicate that those bond premiums were to be included or allowable under bid item number 1. ]

The Decision stated: “The central issue here is whether the parties intended the Corps to reimburse Lane for these actual cost under item 1 absent any equitable adjustment. We have determined, for the reasons given, that item 1, as defined by SC-19 and IB-9, only covered reimbursement of Lane for its actual premiums for required Miller act performance and payment bonds purchased for the United States protection. While allowing reimbursement for subcontract bond costs, FAR 31.205-4 does not apply to aid Lane here because the parties simply did not agree that item 1 covered such costs...”

The Board concluded: “ For the foregoing reasons, therefore, Respondent’s Motion for Summary Judgment is SUSTAINED. Appellant’s Cross-Motion for Summary Judgment is DENIED. The Appeal is DENIED.”

The most relevant point here was that, absent another requirement in the solicitation/contract , paragraph (g) of the contract clause doesn’t refer to upfront payment for discretionary, prime contractor required bonds from its subcontractor(s) for its protection. It only applies to bonds that are required by the contract. 

In this case, the line item for upfront reimbursement wasn’t applicable to subcontract bonds. 

Thus, reimbursement for those costs would be recoverable on a prorated basis under the paragraph (b) of 52.232-5 on progress estimates of the work associated with the applicable subcontract(s). 

Remember that it wasn’t allowable to include the “full” (“total”) amount of required bond premiums in a single progress payment before the paragraph (g) was added to 52.232-5. 

So, the total cost of subcontractor bond premiums (not covered by (g)) can’t be considered as “progress”, separate from the earned progress of the associated bid items for the subcontract. 

Unfortunately, Lane Construction Corp. allegedly included (most of) those costs in Bid Item 1, which only covered actual premiums for contractually required bonds. 

The Decision did indicate that increases in subcontractor bond costs due to equitable adjustments affecting that subcontractor could be allowable under the contract -just not under bid item 1.

Carl, I read your cited case. That was a lump sum bid item for bond costs. It was simply an argument about paying the entire bid item lump sum price even though actual costs were less. There the government had no basis to treat the bid item as NTE. 

In Lane, the government used a not-to-exceed bid item price for premiums for “required bonds”. 

I remember that the Corps used a test program temporarily back in the early to mid 90’s, where certain bid items like bond premiums, mobilization and prepatory work, etc. were set up as Not-to-Exceed based pricing, often to discourage front end loading. It was a PITA to administer, with lots of arguments.

Since it appeared that Lane, as the low bid contract awardee,  had accidentally included $50,000 of legitimate, otherwise allowable subcontract bond costs in the wrong bid item, I might have been inclined to consider recommending to the KO to modify the contract to redistribute the remainder of the bid item 1 NTE allowance to the applicable bid item covering that subcontract. Our lawyers would probably have nixed that idea as setting a precedent. It was a pretty big hit though. And Lane would have still been the low bidder at the same contract price. But...

joel hoffman said:

Here, the wording of Item 1 when read in harmony with other relevant contract provisions, i.e. IB-9 and SC 19, expressly applied only to required Miller Act bonds. As referenced by item 1, SC 19 plainly applied only to “the requirement” for performance and payment bond in contracts over $25,000. In this regard, upon seeing the reference in Item 1 to SC 19, which referred to “the requirement” for bonds, Lane assumed any risk of failing to inquire about the scope of Item one, if it was confused about these reasonably clear provisions.

So in other words the pendulum for reimbursement of sub bond premiums swung on two terms of the contract applicable to Line Item 1 and not 52.232-5(g).  This position of the BCA is supported by this statement in the more recent case I referenced where it states..

C Culham said:

The Lane Construction Corp., ENGBCA No. 5880, 93-1 BCA ¶ 25,448, the Government included language in the bidding schedule restricting bond costs to reimbursement for actual bond premiums paid. Such language was not used in the instant bidding schedule.

Carl, the. Bean Stuyvesant Decision involves different issues than the Lane Construction Decision or the Reese Decision. The Bean Decision involved a lump sum  Bid item to pay for bonding.  

The Lane Construction Corp involved a not to exceed priced bid item. 

The main point of relevance to this discussion in the Lane Decision is that paragraph 52.232-5(g) doesn’t authorize upfront reimbursement of subcontractor bonds, unless the contract otherwise so specifies such. The only mention of bonding requirements in the Lane  contract was for prime  contractor performance and payment bonds required by  the Miller Act using Standard Forms 25 and 25A, respectively.

To separately complicate matters, that contract included a separate, not-to-exceed bid item for bond reimbursement. Lane should have included the subcontract bond in the applicable bid item(s) involving the bonded subcontractor. It didn’t, so had to eat the $50,000 cost of that bond. The Decision really concerned what was reimbursable under that specific bid item. The Board mentioned  that paragraph 52.232-5(g) did not cover subcontract bonds unless they were otherwise required  or specifically authorized for upfront payment.  They weren’t.

In the Reese decision, the solicitation, including the first version of the added paragraph (e) in 52.232-5 for upfront bond reimbursement, specifically limited upfront reimbursement to the Miller Act required bonds and stated that the bond cost was to be included in the contract price. There wasn’t any separate bid item for bonds. However, the clause was included by reference and the contractor didn’t read it.

He thought that the bond was separate from the contract price, so didn’t include anything in his bid for the required bonds. Thus,  Reese did not get reimbursed for any of his bond costs when he submitted the paid invoices asking for reimbursement. . 

In Bean, the government owed the contractor the price of the lump sum bid item. Paragraph 52.232-5(g) wasn’t really applicable  in conjunction with a pre-priced lump sum bid item for bonds. 

I agree with the Decision. 

I also know from long term experiences with dredgers that they will front end load the.  BId schedule when given an opportunity. This was such an opportunity.

There is no need to have a separate Bid Item for bonds. 

I think I mentioned that using separate lump sum bid items for bonds invited all sorts of problems. There was a test program for that in conjunction with an effort to discourage front end loading where we used certain language that allowed us to only pay, for instance, the receipted bond premiums and the rest of the bid item was paid at the end of the contract. The whole thing was a mess for a year or two.  

You are correct that the specific facts of each contract will determine what is an allowable cost and how the contractor can recover the bond cost.

Our debate has been over whether or not the paragraph (g) permits the contractor to be reimbursed upfront for subcontract bond premiums vs. the alternative of prorating it according to earned progress for applicable subcontracted work (I.e., 50% work accomplished includes 50% subcontract  bond reimbursement per paragraph (b)).

A separate bid item for bond payments involves additional complications, whether prices are not-to-exceed or lump sum.

As an aside, it is unwise to include a separate, lump sum or not-to-exceed line item for bonds in construction contracts that include substantial unit priced work line items with estimated quantities. 

The final cost of the bonds to the contractor will generally depend upon the final quantities of unit priced price items in the contract. The bonding agency or the surety will follow up with the contract price changes and settle up at the end of performance.

Its better to just let the contractor spread the bond costs across all the line items and request upfront bond premium reimbursement per the Payments clause.

joel hoffman said:

The main point of relevance to this discussion in the Lane Decision is that paragraph 52.232-5(g)

Joel - You have gone to great lengths to further confuse the matter just as I suspected you would.  Most specifically you synopsized, implied  or otherwise quoted the Lane decision.   In the lengthy effort  throughout this thread to the most recent  there is not one substantive statement, nor one reference by the BCA to "52.232-5(g)", made by other than you that provides that  a contractor cannot be reimbursed for subcontractor bonds pursuant to 52.232-5(g) other than if the contractor has a USACE contract.  If I have missed it please quote the statement by the BCA NOT your own twist on the what the case might or might not say.

joel hoffman said:

As an aside, it is unwise to include a separate, lump sum or not-to-exceed line item for bonds in construction contracts that include substantial unit priced work line items with estimated quantities. 

The final cost of the bonds to the contractor will generally depend upon the final quantities of unit priced price items in the contract. The bonding agency or the surety will follow up with the contract price changes and settle up at the end of performance.

Its better to just let the contractor spread the bond costs across all the line items and request upfront bond premium reimbursement per the Payments clause.

Now you head down a separate path postulating your opinion once again about what to or not to do regarding CLINs and bonding costs but have not provided substantiation (for other than the USACE)  that supports this statement as being correct.

 “However,  buonamma is correct that the contractor can’t request reimbursement for subcontractor bond costs under paragraph 5(g). Those costs must be liquidated/amortized/recovered/spread over progress payments for the work performed by those applicable subs.”

To these points I continue with my conclusion that unless you can provide and quote a specific statement to the contrary you are seriously confused and the above statement by you in this thread is not correct  that a contractor "must" handle subcontractor bonds in one certain way and can't be reimbursed for them.  The contract might dictate such in which case the contractors request for reimbursement or payment as a progress item will be dictated by what the contract says.  If not dictated there is no substantive reference that unequivocally states that a prime contractor may not be reimbursed for subcontractor bond costs under 52.232-5(g).

PS - I hope efforts throughout have helped you understand that there are others, myself included, that have participated in this ad naseum discussion that have extensive experience  in administering construction contracts, reviewing and processing consents of surety, dealing with sureties and their bonding agencies, negotiating and dealing with Tender and Release agreements, Takeover agreements, etc., etc. , handling construction progress payments with numerous CLINs and SubCLINs, etc that are inclusive of bond premiums and which may involve multiple subcontractors.   Likewise "people like me" can and do a mighty fine job of interpreting contracts.  Thank you!

Carl , YOU repeatedly demanded specific references, which I provided. Then YOU didn’t have access to those references and repeatedly asked me for specific language, etc. 

I even quoted the actual FPR amendment to the payments clause that resulted from the  recommendations of the committees and GAO. That clause specifically limited the upfront payment to the required bonds. The clause was quoted in the decision even though it was for claims on Air Force contracts. If that doesn’t convince you of what the GSA and DOD/NASA decided on how to implement the GAO recommendations and the committees’ recommendations, then nothing will.

The only mention of subcontractor bonds in the GAO decision was a statement by the general counsel of the National Surety Providers Association of America of how the contractor has to pay the full price for its bonds upfront,  that they aren’t refundable, that it is a sizable investment and that there are additional cost burden involved when subcontractor bonds are provided. Here is the only mention of subcontractor bonds - not by the government committee - by the surety Industry:

“The General contractor, moreover, has an additional expense in the bids he receives from his subcontractors unless he pays them the full bond premiums for their subcontractor bonds running in his favor, as the cost of their expense
For borrowing to pay bond premiums will be included in their bids to him, and passed on by him in his bid to the owner.”

I did not see where the committees making or approving the report and recommendations mentioned or included subcontractor bonds.

The GAO specifically stated that payments for Bonds REQUIRED BY LAW would not violate the statute prohibition on upfront payment before earned  progress was made provided that the contract allows it (hence amend the payments clause to allow it).

. I told you that several times to no avail.

YOU made your own interpretation of the GAO decision.

I suggest that you reread the entire 1977  GAO Decision carefully and you will see that the GAO refers to bonds required by law,  which protect the government’s interests as well as the subs, suppliers and labor force. 

If the GAO DID include upfront reimbursement of discretionary bonds for protection of the contractor, it was NOT adopted in the resulting FPR or DoD amendments to the Payments clauses. 

I referenced Nash and  Cibinic’s 2006 edition of “Administration of Government Contracts “ which established that the contract clauses covered REQUIRED bonds, not discretionary bonds for the contractor’s own protection.

Regardless of whether the cited ENGBCA decision involves my former organization, Nash and Cibinic cited it in their 2006 book to back up reasoning and explanation regarding contract interpretation - after the ENGBCA was combined into the ASBCA in 2000.
—————————————————-

Edit: By the way for you naysayers, Richard Solibakke, the Chairman of the Engineer Board of Contract Appeals in the Lane Construction Decision, was the Chairman of the Armed Services Board of Contract Appeals before that. He was a highly respected jurist. 

——————————————————

The issue in the Bean Dredge decision had nothing to do with subcontractor bonds being included in the lump sum bid item for bonds. The contractor included other costs associated with the Miller Act bonds and so called admin costs in the lump sum bid item. The government tried to use the paragraph (g) language to say that the contractor could only ask for reimbursement of premiums. The decision said that paragraph in the Payments clause was for a different purpose.and nothing in the bid item description defined a limit on what could be included in the lump sum bid item..

Note that the issue being debated here are the methods and entitlement to upfront reimbursement of discretionary bonds in a fixed price construction contract where progress payments are based upon earned progress.

It is not about allowability of costs for discretionary subcontract bonds. That is not in dispute here. 

 I don’t need to prove anything more to you. 

YOU should provide definite references to back up YOUR interpretation that it is legally permissible to reimburse a contractor upfront - prior to any percentage of work accomplished or prior to earned progress - for payment of discretionary bond premiums for bonds that it requires for its own protection - not for the protection of the government. The Miller Act bonds already provide the government,  the laborers, subcontractors and supplier’s  that protection. 

If Don Mansfield agrees with you, then HE ought to be able to provide definite references to legally support such upfront reimbursement in payments based on progress of work performed.. 

EDIT: By the way, I have been involved in construction contracts with many unit priced line items, without any lump sum items and without any separate line item for bonds. The only way to show payment for a unit priced item is to identify the number of those items completed. One can’t substitute bond payment for a quantity of completed unit priced item of work.

joel hoffman said:

If Don Mansfield agrees with you, then HE ought to be able to provide definite references to legally support such upfront reimbursement in payments based on progress of work performed..

joel,

I think you've been misinterpreting me. I don't have a position on whether subcontractor bonds are included in FAR 52.232-5(g). My point is that the definition of "bond" at FAR 28.001 is not relevant to making that determination. ALAL suggested that it was and that's why I threw the flag for misapplication of FAR definitions.

On 10/3/2019 at 1:16 PM, Don Mansfield said:

joel,

I think you've been misinterpreting me. I don't have a position on whether subcontractor bonds are included in FAR 52.232-5(g). My point is that the definition of "bond" at FAR 28.001 is not relevant to making that determination. ALAL suggested that it was and that's why I threw the flag for misapplication of FAR definitions.

Ok.

Don,  do you agree or disagree or have no opinion that  -

1.Since at least 1984, the Miller Act requires a performance bond (Standard Form 25) and a payment bond (Standard Form 25-A) be furnished for construction contracts exceeding certain dollar thresholds, except under certain exceptions. This is stated at 28.102-1 and 28.106-1.The bond forms are prescribed in 28.106-1. 

2. Prior to the requirement for the clause at 52.228-15, FAR 28.102-3 stated that, when Performance or payment bonds are required, the solicitation qcell shall specify (a) The requirements for the bonds;

(b) The Penal sum of each bond...; and

(c) The deadline for submitting acceptable bonds.

3. Sometime between the dates of Jan 1996 and July 26, 2000 (FAC 97-19) the FAR at 28.102-3 was revised to add the clause at 52.228-15 Performance and Payment Bonds - Construction. This clause specifies the amount required  and bond forms to be used. 

4. The bond forms identify the Principal, the Surety(ies), penal sum , and the obligation to the government (the “obligee').

5. Unless there is another requirement in the Solicitation for different bonds or alternative means of protection , the above references essentially describe the requirements for performance and payment bonds in construction contracts. 

Don, are you saying that you cannot read clause 52.232-5, including paragraph (g), in harmony with clause 52.228-15? 

In other words, are you saying that you do not agree that it, as a contract requirement itself,  merely provides methods and procedures for the payment of progress payments, and in conjunction therewith, payment on a lump sum basis for performance and payment bond premiums where there is an otherwise underlying contractual obligation to pay such costs?

If so, would you please provide the basis for your opinion? 

Thanks.

Joel,

I think the more appropriate question is whether you agree or disagree with the convention at FAR 1.108(a)?  Choose one.  

Here's a link:  https://www.law.cornell.edu/cfr/text/48/1.108

ji20874 said:

Joel,

I think the more appropriate question is whether you agree or disagree with the convention at FAR 1.108(a)?  Choose one.  

Here's a link:  https://www.law.cornell.edu/cfr/text/48/1.108

Apparently Nash and Cibinic and several contract appeals decisions didn’t limit the extent and intent of contract interpretation to the literal convention at 1.108(a). 

And the GAO itself said that the recommended upfront reimbursement is for bonds required by law.

Discretionary bonds that are for the sole protection of the contractor and its surety are not required by law or by the contract unless some rube decides to add such a requirement.

Discretionary bond costs are not necessarily unallowable in the contract price per FAR 31.2.

They just are not allowed to be paid up front in a fixed price construction contract. 

One must understand the distinction between required bond and discretionary bonds and the legal basis that GAO used to rationalize how the government could make up front reimbursements for bonds that are required by law. 

The GAO said it would be necessary to modify the payments clause to allow upfront reimbursements for the performance and payment bonds.  

You want a yes or no answer that is akin to asking me : “Yes or no - Are you still beating your wife?”

It is a very simple question, and it really is a YES or NO question.  I'll take your very long answer as a NO.  

I think you err in lumping that question with the "Are you still beating your wife?" construct, and that you err further in thinking that affirming the answer as YES will weaken your argument (which I understand to be that subcontractor bonds not required by the prime contract are not reached by para. (g) of FAR 52.232-5).  A YES answer could be entirely consistent with your argument.  Rather, it seems that your insistence on NO actually weakens your argument.

ji20874 said:

It is a very simple question, and it really is a YES or NO question.  I'll take your very long answer as a NO.  

I think you err in lumping that question with the "Are you still beating your wife?" construct, and that you err further in thinking that affirming the answer as YES will weaken your argument (which I understand to be that subcontractor bonds not required by the prime contract are not reached by para. (g) of FAR 52.232-5).  A YES answer could be entirely consistent with your argument.  Rather, it seems that your insistence on NO actually weakens your argument.

ji, is it legal on a firm fixed price construction contract to reimburse a contractor upfront for discretionary performance and payment bonds that aren’t a contract requirement,  that it requires for its own protection ? 

If the answer is yes, why can it do that and what legally authorizes it? 

———————————————

Actually, I agree with the statement at FAR 1.108(a) that [as applied to the term performance and payment bonds in FAR 52.232-5] retains its common dictionary meaning -  except that it is only applicable to bonds that are required to be furnished by the contract. One must interpret contract terms in harmony with each other.

A simple “yes” leads to arguments that ANY type of performance or payment bonds can and must be reimbursed upfront upon demand, when the term is read by itself, outside the context of the contract REQUIREMENTS.

I feel that the yes or no question asked hereinbefore was baited.

joel hoffman said:

If the answer is yes, why can it do that and what legally authorizes it?

The contract!

joel hoffman said:

A simple “yes” leads to arguments that ANY type of performance or payment bonds can and must be reimbursed upfront upon demand, when the term is read by itself, outside the context of the contract REQUIREMENTS.

Not true.  "Must" depends on the contract terms.  And as such your statement  that   "the contractor can’t request reimbursement for subcontractor bond costs under paragraph 5(g)."  is also not true unless the contract so says.  You did not and do not know what the contract says.   GSBCA with regard to bond costs that included both prime and subcontractor bond costs has unequivocally stated that "In the absence of  a bidding schedule for a fixed-price contract that contains specific language requiring bidders to include actual bond costs in their bids,  [Foot # 3 ] the Payments clause included in appellant's fixed-price contracts does not limit the contractor's right to receive the entire contract price, even if its actual bond premiums incurred after contract award are less than those estimated during the bidding process. "

Let’s not confuse the allowability of costs in a fixed price contract with when or how they are payable. Unless the contract limits the amount of money the contractor can include in the contract price, the contractor can receive the contract price (allowability issue). Yep.

Contract clauses and terms must comply with the law. Before the original amendments to the payment clauses for fixed price construction contracts, no upfront bond costs were legally allowable as per per several GAO decisions.

In 1977, the GAO clarified that the clauses could be modified to allow upfront payments of premiums for bonds and made it clear in that Decision that it was because the payments would be for bonds that were required in the contract (by law). The clauses were modified to require upfront payments of required bonds in 1979.

This thread is essentially a circular debate with no end. We are all in an echo chamber. 🤪

joel hoffman said:

Contract clauses and terms must comply with the law.

What law prevents a contractor from being able to place the cost of subcontractor bonds in firm fixed construction contract pricing?   None!

What law prevents a contractor from being able to seek payment for such bonds when submitting a request for invoice payment on a firm fixed construction contract?  None.

What law prevents the government from reimbursing the contractor for such bonds in the first payment under a firm fixed construction contract?  None. 

Circular only because you want to imply that such laws do exist.   Such laws do not exist and therefore it is not an argument about laws it is an argument about the plain language of a contract clause.  The contract clause does not define bond therefore any bond for which the contractor can provide full evidence of payment to the surety.

I wrote how I might treat subcontractor bonds under para. (g) of FAR 52.232-5 earlier in this thread.

If a contracting officer agrees to include subcontractor bonds under para. (g) of FAR 52.232-5, life goes on and everyone is happy.

If a contracting officer does not so agree, the contractor will still be paid the full contract price eventually (assuming successful performance).  If the contractor really wants those costs included in the first progress payment under para. (g), it can make that demand as a claim under the Disputes clause.  Indeed, if a contracting officer refuses any payment request for any reason, the contractor may always assert the contract's Disputes clause for resolution.

Thus, it isn't necessary that everyone agree.

C Culham said:

What law prevents a contractor from being able to place the cost of subcontractor bonds in firm fixed construction contract pricing?   None!

I still agree. 

C Culham said:

What law prevents a contractor from being able to seek payment for such bonds when submitting a request for invoice payment on a firm fixed construction contract?

No “law” prevents it from “seeking payment” for such bonds when submitting a request for invoice payment on a firm fixed construction contract.

C Culham said:

What law prevents the government from reimbursing the contractor for such bonds in the first payment under a firm fixed construction contract?  None.

Unless the law has changed, according to the GAO:

”31 U.S.C. §  529 (1970), which provides, in pertinent part, as follows:
"No advance of public money shall be made in any,case unless authorized by the appropriation concerned or other,'law. And in' all cases of contracts for the performance of any service, or the delivery of articles of any description, for the use of the'United States, payment shall not exceed the value of the service rendered, or of the articles delivered previously to such payment.”

“Reimbursement' to Government contractors of the total armouint of paid performance and payment bond premiums in the first progress payment
can be authorieid by amending the relevant ASPR and FPR clauses to specifically  so provide. Such reimbursements are not payments
for future performance, but are reimbursements to the contractor for  his costs in providing a surety satisfactory to the Government as required by'law, end therefore. are not prohibited by 31 U.S.C.  § 529. Prior Comptroller General decision clarified. “

The payment clauses were subsequently amended to allow reimbursement of premiums for Miller Act required performance and payment bonds. Actually the first version required upfront payment for those bonds and did not allow pro-rated payment for those bonds through progress earnings.

Please note that most of the Boards of  Contract Appeals cases that concerned separate bid items for bonds were the result of either the contractor or government being unhappy with the results due to the way the line items  were written, producing results unexpected by one party or the other.  I mentioned earlier that the separate bid items were a pain in the butt. 

If a KO is bound and determined to pay for discretionary bonds upfront, the contract should clearly state that. However, since such bonds aren’t required nor do they protect the government or other subcontractors, it serves little if any public interest and flirts with the GAO’s reasoning why that would be prohibited by the above law.

indeed, the ASPR and FPR were NOT amended to allow upfront reimbursement for such discretionary bonds. Thus they would be paid for on a pro-rated basis as part of earned progress under paragraph (b).

The clause was revised to eliminate the restriction to upfront only reimbursements for the Miller Act bonds. According to several subsequent Decisions, the (g) clause is interpreted to apply to whatever performance and payments bonds are required by the contract.

ji20874 said:

I wrote how I might treat subcontractor bonds under para. (g) of FAR 52.232-5 earlier in this thread.

If a contracting officer agrees to include subcontractor bonds under para. (g) of FAR 52.232-5, life goes on and everyone is happy.

If a contracting officer does not so agree, the contractor will still be paid the full contract price eventually (assuming successful performance).  If the contractor really wants those costs included in the first progress payment under para. (g), it can make that demand as a claim under the Disputes clause.  Indeed, if a contracting officer refuses any payment request for any reason, the contractor may always assert the contract's Disputes clause for resolution.

Thus, it isn't necessary that everyone agree.

I would add that, If a contracting officer agrees to include subcontractor bonds under para. (g) of FAR 52.232-5, then the contract should state that. Life goes on and everyone is happy (or “fat, happy and dumb” 😋).

One could add such text to contracts in his or her contracting officer practice.  But not having such text need not bar a contracting officer and contractor from coming to agreement post-award.  Often, I suppose, this question will first arise during post-award administration.

When I wrote “everyone is happy,” I meant happy in a professional sense.  To re-characterize that as “fat, happy, and dumb” goes beyond my intent, and I regret your re-characterization, even if laughed off with an emoticon.  Perhaps, Joel, someone could make a considered and professional decision that differs from what you would do without being “fat, happy, and dumb”?

By the way, with respect to the questions in the original post,  if you are negotiating a sole source construction contract and the prospective contractor includes costs for subcontract bonds, in particular for _ALL subs and/or supplier_s, that isn’t standard industry practice, per my conversation with a friend who is a long time Surety Bonding Agency co-owner.

I suggest that you have the prospective contractor identify the bonding agency and point of contact, then call them to verify what they are requiring and why.  

When the bonding companies and their sureties require subcontract bonds before selling bonds to contractors, they are pre-qualifying the contractor and will use various criteria on how extensive their requirement will be, based on the strength of the contractor, the size of the subcontracts, the type and complexity of the subcontract work, etc. 

In addition, if it is not a sole source acquisition, the nature of competition will require judicious selection of subcontract bond coverage.

joel hoffman said:

dumb”

I guess the Prompt Payment Act is "dumb" for addressing the matter of sub bonds as they relate to payment to a prime?

C Culham said:

I guess the Prompt Payment Act is "dumb" for addressing the matter of sub bonds as they relate to payment to a prime?

Nope. It discusses retainage from the amount due a sub from the contractor’s progress payment. As you know, the government doesn’t hold retainage on reimbursement for prime contractor bond payments per paragraph (g). 

“52.232-17

...“d) Subcontract clause interpretation. The clauses required by paragraph (c) of this clause shall not be construed to impair the right of the Contractor or a subcontractor at any tier to negotiate, and to include in their subcontract, provisions that --

(1) Retainage permitted. Permit the Contractor or a subcontractor to retain (without cause) a specified percentage of each progress payment otherwise due to a subcontractor for satisfactory performance under the subcontract without incurring any obligation to pay a late payment interest penalty, in accordance with terms and conditions agreed to by the parties to the subcontract, giving such recognition as the parties deem appropriate to the ability of a subcontractor to furnish a performance bond and a payment bond;”

Im not 100% certain what it means. However it appears to mean that the contractor should take into account a subcontractor performance and/or payment bonds, if any,  befote deciding whether or not to withhold** retainsge from the subs Share of a progress payment. If a sub is bondable and furnishes a bond, then there is less need to withhold retainage to protect the (primes) interests. 

You are likely  aware that the government isn’t supposed to  withhold retainage from reimbursement for the prime’s performance and payment bonds (52.232-5 (g)).

**Per the PPA Amendments of 1988, the Government actually physically holds the retainage from the progress payments. The contractor notifies the government of its intent to retain some if the sub’s payment.

There is no government requirement for a prime to pay for or to reimburse a sub upfront for a subcontract bond.

On ‎10‎/‎4‎/‎2019 at 1:05 PM, joel hoffman said:

Nope. It discusses retainage from the amount due a sub from the contractor’s progress payment. As you know, the government doesn’t hold retainage on reimbursement for prime contractor bond payments per paragraph (g).

Exactly (discusses sub to sub as well).

On ‎10‎/‎4‎/‎2019 at 1:05 PM, joel hoffman said:

“52.232-17

Actually 52.232-27

On ‎10‎/‎4‎/‎2019 at 1:05 PM, joel hoffman said:

Im not 100% certain what it means. However it appears to mean that the contractor should take into account a subcontractor performance and/or payment bonds, if any,  befote deciding whether or not to withhold** retainsge from the subs Share of a progress payment. If a sub is bondable and furnishes a bond, then there is less need to withhold retainage to protect the (primes) interests.

Actually I believe the read is this because your thinking assumes privity of contract issues.  The following does not...

Subcontractor submits an invoice to the prime that includes their subcontracting bonding costs.  Prime sends invoice to government seeking reimbursement of all bonding costs.  Government pays prime, prime pays subcontractor. Government does not retain money from the payment but the prime can, should their contract with the sub so state retain money from the sub.  The sub can further retain from lower tier sub contractors if such contracts so state.

Most of all either my interpretation which no doubt you will have conflict, or yours, supports 100% that a subcontractor may have bonds with the prime as the oblige and the government acknowledges same with regard to payments wherein a prime who gets paid for subcontractor bonds can take a retainage.

Consider further that we are talking FFP contracts, either negotiated or bid, and in the case of the latter the government has no inkling as to how the prime priced the contract.  Further support the government arranges the application of PPA in the prime contract to not interfere with a  prime who decides to put ALL bonding in a certain place and request reimbursement for ALL upfront.

All as well leads to the conclusion that we are talking payment processes and not your concocted rules that a prime must include sub pricing in a certain manner and therefore their request for payment processes in some certain fashion when the solicitation and resulting contract are absolutely silent on the matter of sub bonds.

On 10/6/2019 at 9:21 AM, C Culham said:

Subcontractor submits an invoice to the prime that includes their subcontracting bonding costs.  Prime sends invoice to government seeking reimbursement of all bonding costs.  Government pays prime, prime pays subcontractor. Government does not retain money from the payment but the prime can, should their contract with the sub so state retain money from the sub.  The sub can further retain from lower tier sub contractors if such contracts so state.

I’m through arguing with you about your other beliefs but I am going to correct your assertion that the contractor can withhold or retain money from  a government progress payment made to it. 

One of the features of the Prompt Payment Act Amendments of 1988 which industry hated was the prohibition on contractor using retainage or withholding from its subs for financing purposes. The contractor can’t ask for payment of any money that it will retain or withhold from payments to its subcontractor(s).

See paragraph 52.232-27-(h).

“h) Subcontractor payment entitlement. The Contractor may not request payment from the Government of any amount withheld or retained in accordance with paragraph (d) of this clause until such time as the Contractor has determined and certified to the Contracting Officer that the subcontractor is entitled to the payment of such amount.”

In addition, 52.232-5 requires the contractor to certify with each request for progress payments, among other things, the following:

”(c) (2) All payments due to subcontractors and suppliers from previous payments received under the contract have been made, and timely payments will be made from the proceeds of the payment covered by this certification, in accordance with subcontract agreements and the requirements of chapter 39 of Title 31, United States Code;

(3) This request for progress payments does not include any amounts which the prime contractor intends to withhold or retain from a subcontractor or supplier in accordance with the terms and conditions of the subcontract; and...”

It’s been that way since April 1989, Carl.

In 1988, Congress listened to the complaints of the subcontracting community that contractors were using Retainage and withholdings from the subs’ earnings to help finance the project.

The law and the prompt pay clause allow the contractor to retain or withhold in accordance with its subcontract. However, it can’t seek payment for that retainage or withholding until it is ready to pay those amounts to its subs.

joel hoffman said:

I’m through arguing with you about your other beliefs but I need to correct your assertion that the contractor can withhold or retain money from  a government progress’s payment to it.

Joel thank you for the correction and as you note a prime can request  payment for sub bonding costs, and if so paid must pay the sub the full bonding costs.   The prime and the government can not  "retain" any amount from payment .

Here is my correction to my post -

Subcontractor submits an invoice to the prime for subcontracting bonding costs.  Prime sends contractor  invoice to government seeking reimbursement of all bonding costs including that of the sub.   Government does not retain money from the payment.  Government pays prime, prime pays subcontractor.

On 10/6/2019 at 6:01 PM, C Culham said:

Joel thank you for the correction and as you note a prime can request  payment for sub bonding costs, and if so paid must pay the sub the full bonding costs.   The prime and the government can not  "retain" any amount from Payment.

Carl, please don’t put words in my mouth. 

I did not agree, note or say that the prime can submit an invoice for upfront payment of subcontractor bonds. 
 
I haven’t changed my position that upfront payment is only for contractually required bonds, not for financing discretionary ebonds for the sole protection of the prime or its bonding company.

On 10/6/2019 at 1:57 PM, joel hoffman said:

The contractor can’t ask for payment of any money that it will retain or withhold from payments to subcontractor.

Fact : The contractor can’t ask for payment of any money in a progress payment that it will retain or withhold from payments to subcontractor.

On 10/6/2019 at 1:57 PM, joel hoffman said:

I need to correct your assertion that the contractor can withhold or retain money from  a government progress payment made to it.

Fact. That’s the only point I made.

Those who are administering or have administered construction contracts awarded after 31 March 1989, should know this.

 It’s been that way since April 1, 1989. (for 30 1/2 years) !

The PPA Amendments of 1988 preclude the prime contractor from asking for payment of any amounts that will be retained or withheld from payments to subcontractors or suppliers.  That was one of many changes to progress payments for FP construction contracts. 

The Prompt Payment clause and the Payments clause for fixed price construction  were both updated, effective April 1, 1989 for all contracts awarded after March 31, 1989. This was to implement the Prompt Payment Act Amendments of 1988.