Federal Contract Bonds

Many, if not all, contractors have at least a passing knowledge of surety bonds as they relate to the construction business. These bonds are required for any contract or job over $100,000 as the result of legislation set forth in the Miller Act of 1935 and amended by the Federal Acquisition Streamlining Act of 1994. The intention of the Miller Act was to protect consumers in the event of contractual default on the part of the contractor as well as any other contractor fraud or lack of performance.

If, however, you're investigating doing construction work as a contractor for the federal government, there are also regulations surrounding the use of surety bonds. The Miller Act stipulates that contractors must furnish surety bonds for all federal construction contracts up to $100,000 just as with other non-governmental contracts. The amount of the bond must be satisfactory to the contracting officer, and one requirement is a payment bond for a penal sum up to $2.5 million. Including the payment bond, there are actually several different types of surety bonds required for federal contracts.

A bid guarantee ensures that the contractor will enter into the contract agreed upon and provide the required payment and performance bonds. Bid guarantees are usually purchased as a bond. However, in the case of federal contracts, they can take the form of postal service money orders, irrevocable letters of credit, or a certified cashier's check. Bid bonds and bid guarantees are required to bid on a governmental contract and are returned to unsuccessful bidders.

A payment bond guarantees that the contractor will pay subcontractors who provide labor, materials, equipment or supplies during the project. The penal amount of the payment bond must be a maximum of $2.5 million where the contract price is more than $5 million, and for contracts less than $5 million, the penal sum of the payment bond is required to be forty to fifty percent of the contract price.

A performance bond ensures that the contractor will perform the contract in accordance with its terms. Payment bonds are generally 100% of the cost of the contract, and changes if the contract value changes. The surety bond company is also entitled to receive information from the contractor regarding work and payment status and estimated time to completion.

As you can see, surety bonds play a critical role in doing business with the government.