Secrets of Bonding 160: No More Performance Bonuses

Secrets of Bonding 160: No More Performance Bonuses

This is the Bonding Company’s worst nightmare. In this 160th article in our bond series, we’ll cover situations where a performance or payment bond is not required. Some of the projects are large and federal, some are private, ALL are unrelated. Here we go!

As a point of reference, you can expect federal, state, and municipal contracts to require a Performance and Payment Bonus (P&P) equal to the amount of the contract. They usually do. General contractors working for a private owner, such as building an office building or apartment project, may face the same requirement. This can also apply to subcontractors.

Federal Projects

This area includes all branches of the federal government. Examples: Army Corps of Engineers, General Services Administration, Dept. of Energy, etc. Their contracts are administered following the rules of the Federal Procurement Regulations (FAR).

The FAR says a P&P bond is not required on contracts under $ 150,000.

For contracts of $ 150,000 and more that require collateral, there are times when the bond requirement can be lowered below 100% or eliminated entirely. These include:

  • Contracts abroad

  • Emergency acquisitions

  • Single source projects

If the bond requirement it is Mandatory, the FAR lists acceptable alternatives:

  • US government (investment) bonds

  • Certified check

  • Bank Draft

  • Money order

  • Badge

  • Irrevocable credit card

Here’s another option: for contracts made in a foreign country, the government may accept a bond of a Deposit not listed in T. (Circular 570)

State and municipal contracts

Linkage requirements can vary by state, but generally taste similar to federal.

Private contracts

Anything goes. In private contracts, the owner has full discretion in setting the bond requirements, including no need for bond. Note that the cost of the security deposit is added to the contract, so the owner can save some money by no requiring a surety. They can take other precautions to protect themselves. Some examples:

  • It requires a hold. These are funds that are withheld from the contractor and only released when the project is fully accepted.

  • Link releases may be required each month to demonstrate that vendors and subcontractors are being paid adequately.

  • Control of funds / Tripartite agreement: a payer is used to handle the contract funds

  • Joint checks are issued to the contractor and the payees below them, to ensure that the funds reach the intended parties.

  • Physical site inspections to check progress

The nightmare

In these articles we talk a lot about how contractors can obtain and manage bonds. But it’s interesting to note: a construction company could go on forever, doing state and federal projects, and NEVER get a bond. It’s true!

If everyone did this, it would be the worst bail nightmare. But in reality, there are financial advantages to using P&P bonds, so tying is often the first option.

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