The Bonding Requirement
The Miller Act, passed by Congress in 1935, requires contractors on all federal construction projects over $150,000 to post two surety bonds as a condition of awarding the contract: a performance bond and a payment bond. The payment amount of both bonds is the full contract price, unless a lower amount is approved (FAR 28.102-2).
How Bonds Work
Performance bonds benefit the awarding government agency. Under a performance bond, if the general contractor defaults in the performance of its work or is terminated for cause, the agency may turn to the surety to step in and take over the general contractor’s obligations under the prime contract. Performance bonds provide the agency a guarantee the construction project will be completed for the contract price.
Payment bonds benefit subcontractors and suppliers. Subcontractors and suppliers cannot assert a lien against, or otherwise encumber, US property. Payment bonds protect eligible subcontractors and suppliers against nonpayment by providing them with an alternative means of recovery if the general contractor fails to make payment. Rather than recording a lien, qualifying subcontractors and suppliers may bring an action on the payment bond for any unpaid amount.
Bond Are Always Required—Even if They Are Not in the Contract
In K-Con, Inc. v Sec. of the Army, decided on November 5, 2018, the U.S. Court of Appeals for the Federal Circuit considered a commercial items contract for pre-engineered metal buildings that did not include the bond clause. After contract award the contracting officer required the contractor to provide bonds and would not allow the contractor to begin performance until the bonds were delivered, which resulted in increased costs of $116,337. The contractor argued the contract was a commercial items contract, the bonding clause was not included, and asked for a contract modification to cover the increased costs. The contracting officer denied the request, finding the scope was for construction and therefore bonding was mandatory and the clause was included by law. The Court upheld the contracting officers decision.
Contractors should be aware the K-Con case means that bonds are mandatory for federal construction, even when not included in the contract terms, and even when the contract is not solicited as a construction contract. If you are uncertain about whether bonds are required, you must ask for clarification or risk the cost impact of adding bonds later.
If you have questions regarding federal construction bonding requirements or other federal government contract issues, contact the professionals at Williamson Law Group at (301) 788-8198 for confidential and candid assistance and counsel, or e-mail Scott Williamson, managing attorney, at firstname.lastname@example.org.
This Contract Compliance Update is to keep readers current on government contract matters and is not intended to be legal advice. If you have any questions, please contact Williamson Law Group for legal advice regarding your particular case.