FAR Part 28 Flashcards
Bonds and Insurance
Part 28
Bonds and Insurance
FAR Part 28: Bonds and Insurance
Overview of FAR Part 28 - Bonds and Insurance
Purpose: Establishes requirements for bonds and insurance in government contracts (FAR 28.000).
Key Sections:
28.1 Bonds and Other Financial Protections
28.2 Sureties and Other Security for Bonds
28.3 Insurance
FAR Part 28: Bonds and Insurance
Overview of FAR Part 28 - Bonds and Insurance
Instructor Dialogue
FAR Part 28 focuses on the requirements for bonds and insurance in government contracts.“
“These provisions help mitigate financial risks and protect the government’s interests.“
“Understanding these requirements is essential for ensuring compliance and managing potential risks.”
FAR Part 28: Bonds and Insurance
Subpart 28.1 - Bonds and Other Financial Protections
Purpose: Establishes the use of bonds to protect the government against financial loss (FAR 28.101).
Key Features:
Types of bonds include bid bonds, performance bonds, and payment bonds (FAR 28.101-1).
Bid bonds ensure that bidders will honor their bids (FAR 28.101-2).
Performance bonds guarantee the contractor’s performance (FAR 28.101-3).
Payment bonds ensure that subcontractors and suppliers are paid (FAR 28.101-4).
FAR Part 28: Bonds and Insurance
Subpart 28.1 - Bonds and Other Financial Protections
Instructor Dialogue
Subpart 28.1 establishes the use of bonds to protect the government against financial loss.“
“Types of bonds include bid bonds, performance bonds, and payment bonds.“
“Bid bonds ensure that bidders will honor their bids.“
“Performance bonds guarantee the contractor’s performance.“
“Payment bonds ensure that subcontractors and suppliers are paid.”
FAR Part 28: Bonds and Insurance
Subpart 28.2 - Sureties and Other Security for Bonds
Purpose: Provides guidelines for the use of sureties and other security forms (FAR 28.200).
Key Features:
Acceptable sureties include corporate sureties and individual sureties (FAR 28.202-1).
Corporate sureties must be listed in the Department of the Treasury’s Listing of Approved Sureties (FAR 28.202-2).
Individual sureties must pledge assets to cover the bond amount (FAR 28.203-1).
Alternatives to sureties include letters of credit and escrow accounts (FAR 28.204).
FAR Part 28: Bonds and Insurance
Subpart 28.2 - Sureties and Other Security for Bonds
Instructor Dialogue
Subpart 28.2 provides guidelines for the use of sureties and other security forms.“
“Acceptable sureties include corporate sureties and individual sureties.“
“Corporate sureties must be listed in the Department of the Treasury’s Listing of Approved Sureties.“
“Individual sureties must pledge assets to cover the bond amount.“
“Alternatives to sureties include letters of credit and escrow accounts
FAR Part 28: Bonds and Insurance
Subpart 28.3 - Insurance
Purpose: Outlines the requirements for insurance in government contracts (FAR 28.301).
Key Features:
Contractors must obtain and maintain insurance as required by the contract (FAR 28.301-1).
Types of required insurance may include worker’s compensation, liability, and property insurance (FAR 28.301-2).
Contractors must provide evidence of insurance coverage (FAR 28.301-3).
FAR Part 28: Bonds and Insurance
Subpart 28.3 - Insurance
Instructor Dialogue:
Subpart 28.3 outlines the requirements for insurance in government contracts.“
“Contractors must obtain and maintain insurance as required by the contract.“
“Types of required insurance may include worker’s compensation, liability, and property insurance.“
“Contractors must provide evidence of insurance coverage.”
Forms of financial protection against losses under contracts include:
Bid guarantees * Bonds
Alternative payment protections
Sureties (security for bonds)
Insurance
These apply to contracts that result from either sealed bidding or negotiation.
Bond
A written instrument executed by a first party and a second party (except as provided in 28.204), to assure fulfillment of the first party’s obligations to a third
party identified in the bond
Assures payment, to the extent stipulated, of any loss sustained by the third party if the bidder or contractors obligations are not met
The first party: the principal - the bidder or contractor
The second party: the surety — usually an insurance company
The third party: the obligee - the government
Types of Bonds
Payment bond
Ensures payments as required by law
to al persons supplying labor or material in the prosecution of the work provided for ni the contract
A payment bond is only required when a performance bond is also required.
Types of Bonds
Annual performance bond
A single bond, ni lieu of separate performance bonds, to secure fulfillment of the contractor’s obligations under contracts other than for construction requiring bonds
entered into during a specific fiscal year
Types of Bonds
Annual bid bond
A single bond, in lieu of separate
bonds, which secures all bids on other than construction contracts requiring bonds submitted during a specific fiscal year
Types of Bonds
Advance payment bond
Secures fulfillment of the contractor’s obligations under an advance payment provision
Types of Bonds
Patent infringement bond
Secures fulfillment of the contractor’s obligations under a patent provision
Bid Guarantees
Penal sum
Penal amount
The amount of money specified in a bond (or a percentage of the bid price in a bid bond) as the maximum payment for which the surety is obligated
The amount of security required to be pledged to the government in liuw of a corporate or individual surety for the bond
Bid Guarantees
Bid guarantee
Abform of security assuring that the bidder will not withdraw a bid within the period specified for acceptance and will execute a written contract and furnish required bonds within the allotted time following award
Bonds and bid guarantees typically pertain to construction contracts.
A contracting officer shall not require a bid guarantee unless a performance bond or a performance and payment bond is also required.
The Bonds Statute
Previously known as the Heard Act (1894) and the Miller Act (1935)
Requires prime contractors on some government construction contracts to post bonds guaranteeing:
Performance of their contractual duties, and
Payment of their suppliers and subcontractors
Applies to any construction contract valued in excess of $150,000, unless waived
Bonds for Construction Contracts
Bonds statute requires performance and payment bonds for any U.S. construction
contract exceeding $150,000
The contractor shall furnish all
bonds or alternative payment protection before receiving a notice to proceed with the work or being allowed to start work
Penal amount of performance bonds must equal 100% of the original contract price
Amount of payment bonds must equal 100% of the original contract price
If the contract price increases, the bond amount must increase
by 100% of the increase
Other Than Construction Contracts
Generally, performance and payment bonds are not required.
Circumstances that may require such bonds for other than construction contracts include:
Government property or funds are to be provided to the contractor for use in performing the contract or as partial compensation
A contractor sells assets to or merges with another concern, and the government, after recognizing the latter concern as the successor in interest, desires assurance that ti is financially capable
Substantial progress payments are made before delivery of end items starts
Contracts are for dismantling, demolition, or removal of improvements
Sureties
Individual surety
* One person, versus a business entity, is liable for the entire penal amount of the bond
Corporate surety
* Licensed under various insurance laws, and, under its charter, has legal power to act as surety for others
Co-surety
* Two or more sureties are jointly liable for the penal sum of the bond
Corporate Sureties
Must appear on the “Companies Holding Certificates of Authority as Acceptable Sureties on
Federal Bonds and Acceptable
Reinsuring Companies” list
The penal amount of the bond
should not exceed the surety’s underwriting limit
Individual Sureties
Acceptable for all types of bonds except position schedule bonds
The contracting officer shall
determine the acceptability of
individuals proposed as sureties
The individual must have
pledged assets sufficient to cover the bond obligation
Insurance
A contract which provides that for a stipulated consideration, one party undertakes to indemnify another against loss, damage, or liability arising from an unknown or contingent event
FAR PART 28. BONDS AND INSURANCE
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.
BID GUARANTEE:
A form of security ensuring that the bidder will not withdraw a bid within the period specified for acceptance and will execute a written contract and furnish required bonds, within the allotted time following award.
BOND:
A written instrument executed by a bidder or contractor (the principal) and a second party (the surety)(except as provided in FAR 28.204) to ensure fulfillment of the principal’s obligations to a third party (the obligee or government) identified in the bond. If the principal’s obligations are not met, the bond assures payment, to the extent stipulated, of any loss sustained by the obligee.
BOND TYPES:
- Advance payment bond-secures fulfillment of the contractor’s obligations under an advance payment provision;
*Annual bid bond—a single bond, in lieu of separate bonds, which secures all bids on other than construction contracts requiring bonds submitted during a specific fiscal year;
- Annual performance bond-a single bond, in lieu of separate performance bonds, to secure fulfillment of the contractor’s obligations under contracts other than for construction requiring bonds entered into during a specific fiscal year;
*Patent infringement bond-secures fulfillment of the contractor’s obligations under a patent provision;
- Payment bond-ensures payments as required by law to all persons supplying labor or material in the prosecution of the work provided for in the contract; and
*Performance bond-secures performance and fulfillment of the contractor’s obligations under the contract.
INSURANCE:
A contract that provides that for a stipulated consideration, one party undertakes to indemnify another against loss, damage, or liability arising from an unknown or contingent event.
A contracting officer shall not require a bid guarantee
unless a performance bond or a performance and payment bond is also required. In sealed bidding, noncompliance with a solicitation requirement for a bid guarantee requires rejection of the bid except for those situations described in FAR 28.101-4(c).
The Bonds statute (formerly Miller Act) requires performance and payment bonds
for any construction contract valued in excess of the amount referred to in
(FAR 28.102-3(a). Generally, such bonds are not required for other than construction contracts; however, in some situations, performance bonds may be appropriate.
Performance bonds secure performance and fulfillment of the contractor’s obligations under the contract.
They may be required
for contracts exceeding the simplified acquisition threshold when necessary to protect the government’s interest. Situations that may warrant a performance bond are delineated in
Unless the contracting officer determines that a lesser amount is adequate for the protection of the government, the penal amount of performance bonds must equal 100 percent of the original contract price;
and if the contract price increases, an additional amount equal to 100 percent of the increase.
Payment bonds ensure payment as required by law to all persons supplying
labor or materials in the prosecution of the work provided for in the contract.
They are required only when a performance bond is required and it is determined to be in the government’s best interest to use them. Penal amounts are determined by the contracting officer.
Any person required to furnish a bond to the government may furnish any of the following types of securities instead of a corporate or individual surety for the bond:
U.S. bonds or notes; certified or cashier’s checks, bank drafts, money orders, or currency; or an irrevocable letter of credit (ILC).
The contractor must furnish all bonds or alternative payment protection, including any necessary reinsurance agreements, before receiving a notice to proceed with the work or being allowed to start work.
Surety means an
individual or corporation legally liable for the debt, default, or failure of a principal to satisfy a contractual obligation.
There are three types: individual, corporate, and co-surety (one of two or more sureties that are jointly liable for the penal sum of the bond).
Individual sureties are required
to support bond obligations with stable U.S.-backed securities, as specified in 31 CFR part 225. The Department of the Treasury, Bureau of the Fiscal Service must review those assets to ensure they meet established eligibility
Agencies are required to obtain adequate security for
bonds required or used with a contract. Acceptable forms of security include
corporate or individual sureties or any of the types of security authorized in lieu of sureties (i.e., United States bonds or notes, certified or cashier’s checks, bank drafts, Post Office money orders, or currency, or an irrevocable letter of credit).
The government requires any contractor subject to CAS 416 to obtain insurance, by
purchase or self-coverage, except when the government agrees to indemnify the contractor under specified circumstances or the contract specifically relieves the contractor of liability for loss or damage to government property.
Contractors, whether or not subject to CAS 416, are required by law and the FAR to provide certain types of insurance
(e.g., workers’ compensation). Insurance is also required when commingling of property, type of operation, circumstances of ownership, or condition of the contract make it necessary for the protection of the government.
Although the government is not ordinarily concerned with the contractor’s insurance coverage if the contract is a fixed-price contract, in special
circumstances agencies may specify insurance requirements under fixed-price contracts. Examples of such circumstances include the following: the contractor is, or as a separate operation, engaged principally in government work; government property is involved; work is to be performed on a government installation; or the government elects to assume risks for which the contractor ordinarily obtains commercial insurance.
