Bonds on Federal Work and the Statute That Requires Them

Federal construction is bonded by statute. Before a contract exceeding the statutory figure is awarded for the construction, alteration or repair of a public building or public work of the federal government, the contractor must furnish a performance bond for the protection of the government and a payment bond for the protection of all persons supplying labor and material. Both become binding when the contract is awarded.

The two thresholds that do not match

The statute states one hundred thousand dollars. The acquisition regulation implements the requirement for construction contracts exceeding one hundred fifty thousand dollars. The discrepancy is not an error: acquisition thresholds are adjusted periodically for inflation under a general authority, and the regulation carries the adjusted figure while the underlying statutory text remains as enacted. A reader who consults only the statute will state the requirement at the wrong level.

The same divergence appears in the band below. The statute directs the regulation to provide alternatives to payment bonds for contracts more than twenty-five thousand dollars and not more than one hundred thousand. The regulation applies its alternatives to contracts greater than thirty-five thousand dollars but not greater than one hundred fifty thousand. In that band the contracting officer must select two or more forms of protection, giving particular consideration to including an irrevocable letter of credit.

The alternatives below the bond threshold

The listed protections are a payment bond, an irrevocable letter of credit, a tripartite escrow agreement, certificates of deposit and, in some circumstances, deposits of cash or acceptable securities. The escrow mechanism is the most structurally interesting: the prime contractor establishes an account at a federally insured institution and enters an agreement with the institution as escrow agent and with all suppliers of labor and material, under which the government pays into the account and the agent distributes according to the agreed terms.

From a claimant's perspective the practical point is that these protections operate differently from a bond. A letter of credit is drawn on by the government rather than by an unpaid supplier. An escrow arrangement gives the supplier rights only if the supplier is a party to it. Establishing what protection exists, and whether it is enforceable directly, should be the first step on any federal project below the bond threshold.

Coverage is also not universal above the threshold. The statute permits a contracting officer to waive both bonds for work under a contract performed in a foreign country where furnishing them is impracticable, and permits named service secretaries and the transportation secretary to waive the subchapter for specified cost-type and vessel contracts. Those waivers are narrow and are exercised deliberately, but a supplier assuming that any federal project of size carries a payment bond is assuming something that occasionally is not true. Verification through the agency is a short exercise and the statute expressly provides the route.

Bond amounts and their adjustment

The performance bond is furnished in an amount the awarding officer considers adequate, with the regulation using the original contract price as the ordinary measure and providing for increase where the price rises. The payment bond must equal the total amount payable under the contract unless the awarding officer determines in writing, supported by specific findings, that a bond in that amount is impractical, in which case the officer sets the amount. The statute adds a floor: the payment bond may never be less than the performance bond.

Performance bonds on federal work carry an additional obligation not always appreciated. Each must specifically provide coverage for taxes collected, deducted or withheld from wages the contractor pays in carrying out the contract. The government must give the surety written notice of unpaid taxes within defined periods measured from the filing or due date of the relevant return, and may not sue on the bond for those taxes without notice or more than one year after notice is given.

The statute is equally clear that the requirement is a floor rather than a ceiling. Nothing in it limits a contracting officer's authority to require a performance bond or other security in addition to those specified, or in cases other than those specified. Agencies use that authority on projects with unusual risk profiles, and supplemental security taken under it sits outside the statutory scheme, with its own terms governing who may claim and on what conditions.

Who the payment bond protects

Every person who has furnished labor or material in carrying out work provided for in the contract and has not been paid in full within ninety days after last furnishing may bring a civil action on the payment bond. The action is brought in the name of the United States for the use of the claimant, in the district court for any district where the contract was to be performed, regardless of the amount in controversy. The tiers of persons who qualify are set out in who may claim, by tier, and the additional obligation imposed on remote claimants is covered in the notice a remote claimant must give.

Two protective provisions deserve note. A waiver of the right to sue on a required payment bond is void unless it is in writing, signed by the person whose right is waived, and executed after that person has furnished labor or material for the contract. And the contracting agency must furnish a certified copy of the bond and the contract to any person who applies and submits an affidavit of having supplied labor or material and not been paid, the copy being prima facie evidence of the original. The equivalent state schemes and where they depart from this pattern are compared in little Miller Acts and where they diverge from the federal rule.