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Interim Internal Purchasing Guidelines > 7 Bonds, Insurance, and Taxes
7 Bonds, Insurance, and Taxes
7.1.1 General
7.1.1.a Guidelines. Bonds (other than bonds required for construction contracts) (see
7.1.2.a) and performance guarantees should only be obtained when needed
to protect the interest of the Postal Service. Purchase plans (see 2.1) must
describe and explain any requirements for bonds and performance
guarantees.
7.1.1.b Definitions
1. Annual bond. A single bond in place of separate bonds to secure all of
a supplier's obligations under contracts entered into during a specific
fiscal year.
2. Bond. A written instrument executed for the benefit of the Postal
Service as security for the supplier's obligations, and to assure
payment of any bonded loss. A bond is executed by an offeror or
supplier identified in the instrument as the principal, together with a
second party identified as the surety.
3. Consent of surety. An acknowledgment by a surety that its bond
continues to apply to the contract as modified.
4. Fidelity bond. A bond to assure the faithful performance of an
employee's duties to his or her employer and the employer's clients.
The bond is used to cover losses such as employee thefts or
embezzlements.
5. Patent infringement bond. A bond given as security for a supplier's
obligations under a patent clause.
6. Payment bond. A bond to assure payment of all persons supplying
labor and material under a contract.
7. Performance bond. A bond given as security for the supplier's
obligations under a contract.
8. Irrevocable letter of credit (ILC). A written commitment by a federally
insured financial institution to pay all or part of a stated amount of
money on demand by the Postal Service until the expiration date of the
letter. The letter of credit cannot be revoked or conditioned.
9. Penal amount. The amount specified in a bond (expressed in terms of
dollars or a percentage of the contract price) as the maximum payment
for which the surety is obligated.
10. Surety. An individual or corporation legally liable for another's debt,
default, or failure to satisfy a contractual obligation.
7.1.2 Performance and Payment Bonds for Construction
Contracts
7.1.2.a General
1. The Miller Act (40 U.S.C. 2701-270f) requires performance and
payment bonds or alternate payment protection for any construction,
alteration, or repair of any public building or public work valued at over
$25,000.
2. For construction contracts greater than $25,000 but less than
$100,000, the contracting officer must select a payment bond and one
or more of the following payment protections, giving consideration to
inclusion of an irrevocable letter of credit as one of the selected
alternatives.
(a) An irrevocable letter of credit.
(b) Certificates of deposit. The supplier deposits certificates of
deposit from a federally insured financial institution with the
contracting officer, in an expectable form, executable by the
contracting officer.
(c) A tripartite escrow agreement. The prime supplier establishes an
escrow account in a federally insured financial institution and
enters into a tripartite escrow agreement with the financial
institution, as escrow agent, and all of the suppliers of labor and
material. The escrow agreement must establish the terms of
payment under the contract and of resolution of disputes among
parties. The Postal Service makes payments to the supplier's
escrow account, and the escrow agent distributes the agreement,
or triggers the disputes resolution procedures if required.
(d) A deposit of the types of security listed in 7.1.9.d.
3. The supplier will submit to the Postal Service one of the payment
protections selected by the contracting officer.
4. For construction contracts greater than $100,000, the supplier must
provide the following:
(a) A payment bond.
(b) A performance bond.
5. Amount
(a) Unless the contracting officer determines that a lesser amount is
adequate for the protection of the Postal Service, the penal
amount of a performance bond must equal 100 percent of the
original contract price (see (c) below), and, if the contract price
increases, an additional amount equal to 100 percent of the
increase. The contracting officer must include the bond amount in
the schedule.
(b) Unless the contracting officer makes a written determination
supported by specific findings that a payment bond in this amount
is impractical, the amount of the payment bond must equal 100
percent of the original contract price (see (c) below), and, if the
contract price increases, an additional amount equal to 100
percent of the increase. The amount of the payment bond may
not be less than the amount of the performance bond. The
contracting officer must indicate the bond amount in the schedule.
(c) The original contract price is (1) the award price of the contract;
(2) the price payable for the estimated total quantity of a
requirements contract; or (3) the price payable for the specified
minimum quantity of an indefinite delivery contract. The original
contract price does not include the price of any options except
options exercised at the time of contract award.
6. Solicitation Provisions
(a) For requirements estimated to exceed $25,000 but not greater
than $100,000, include Provision 7-5, Alternate Payment
Protections. Complete the provision by specifying the payment
protection selected, the penal amount required, and the deadline
for submission. For payment bonds, include Provision 7-2,
Payment Bond Requirements.
(b) For requirements estimated to exceed $100,000, include
Provision 7-1, Performance Bond Requirements, and Provision
7-2, Payment Bond Requirements.
7.1.3 Performance and Payment Bonds for Other than
Construction Contracts
7.1.3.a Performance Bonds
1. Requirement. Performance bonds may be required only if the
contracting officer determines that performance bonding is essential to
the interest of the Postal Service. Examples of situations in which a
performance bond may be needed include times when:
(a) A contract provides for the use of Postal Service property or
funds in contract performance;
(b) A supplier has sold all its assets to, or merged with, another firm
and the Postal Service needs assurance of the new firm's
capability; or
(c) The product or service is not scheduled for first delivery until at
least 12 months after contract award, and substantial progress
payments are contemplated.
2. Amount. The penal amount must be the minimum needed to protect the
Postal Service's interest.
3. Solicitation Provision. Include Provision 7.1, Performance Bond
Requirements, in solicitations for nonconstruction contracts if it is
determined that performance bonding is essential to the interest of the
Postal Service. If the penal amount is less than 100 percent of the
contract price, the provision must be modified accordingly.
7.1.3.b Annual Performance Bonds. Annual performance bonds may be used only
for contracts other than construction contracts. The penal amount of such a
bond may not be more than the total amount of all contracts secured by the
bond.
7.1.3.c Payment Bonds
1. Requirement. Payment bonds may be required only if the contracting
officer determines that payment bonding is essential to the interest of
the Postal Service. Examples of situations in which a payment bond
may be needed include times when:
(a) A contract is for supplies or services unique to the Postal Service
that can be obtained only from a source that is not the producer
of the supplies or services;
(b) A supplier has sold all its assets to, or merged with another firm
and the Postal Service needs assurance of the new firm's
capability;
(c) Supplies requiring substantial production costs are not scheduled
for first delivery until several months after contract award, and no
progress payments are contemplated; or
(d) Uninterrupted provision of the supplies or services is essential to
the continued operation of Postal Service functions.
2. Amount. The penal amount must be the minimum needed to protect the
Postal Service's interest.
3. Solicitation Provision. Include Provision 7-2, Payment Bond
Requirements, in solicitations for nonconstruction contracts if it is
determined that payment bonding is essential to the interest of the
Postal Service.
7.1.3.d Annual Payment Bonds. Annual payment bonds may be used only for
contracts other than construction contracts. The penal amount of such a bond
must be sufficient to cover the bonded portions of the contracts awarded.
7.1.4 Patent Infringement Bonds
A patent infringement bond may be required under a contract containing a
patent indemnity clause if a performance bond is not obtained. The penal
amount must be the minimum necessary to protect the Postal Service's
interest. Clause 7-1, Patent Infringement Bond Requirements, must be
included in the contract if the supplier may be required to submit a patent
infringement bond.
7.1.5 Fidelity Bonds
A fidelity bond in an amount sufficient to protect the interest of the Postal
Service may be required for any contract that requires supplier employees to
handle Postal Service funds. When a fidelity bond is required, Provision 7-3,
Fidelity Bond Requirements, must be included in the solicitation, and the
amount must be reviewed periodically to ensure that the Postal Service's
interest is adequately protected.
7.1.6 Contract Postal Unit Bonds
Contract postal unit bonds impose obligations on a supplier similar to those
required under performance, payment, and fidelity bonds. Generally, contract
postal unit bonds are required before a contract postal unit contract may be
awarded, but in certain circumstances this requirement can be waived by the
contracting officer.
7.1.7 Other Types of Bonds
Bonds other than those discussed in this chapter may be required when the
contracting officer considers them in the Postal Service's interest. In these
cases, appropriate solicitation provisions and contract clauses must be
drafted with the assistance of assigned counsel.
7.1.8 Execution of Bonds
7.1.8.a Prescribed Formats. See the relevant handbook for guidance and
procedures.
7.1.8.b Other Formats. When there is no prescribed format for a bond (as when a
patent infringement or fidelity bond is required), a suitable commercial bond
form may be used, or an appropriate format may be prepared with the
assistance of assigned counsel.
7.1.8.c Original Copy. An original signed copy of any bond must be retained in the
solicitation or contract file.
7.1.8.d Authority of Agents. Bonds signed by persons acting in a representative
capacity must be accompanied by proof that the agent is authorized to act in
that capacity. Proof may be a notarized power of attorney, or a properly
executed corporate certificate or resolution, attested to by the corporate
secretary.
7.1.8.e Partnership as Principal. When a partnership is a principal, the names of all
members of the firm must be listed in the bond, following the trade name of
the firm (if any) and the phrase "a partnership composed of." When a
corporation is a principal, the state of incorporation must be listed.
7.1.8.f Date. Unless an annual bond is accepted, performance or payment bonds
must be dated after the date of the contract. (See 4.3 for award procedures
for construction contracts.)
7.1.8.g Contract Modifications
1. When a contract modification increases the contract price, the supplier
and the surety must execute a consent of surety and increase the penal
amount, and submit it to the contracting officer. When more than one
surety's consent is required, each surety must execute the form.
2. When an increased bond amount is obtained from a party other than
the original surety, the original surety must execute a consent of surety.
3. Novation agreements (see 6.5.4.a.2) require the execution of a consent
of surety.
7.1.9.a Acceptable Sureties
1. Bonds must be supported by acceptable corporate sureties, or by
assets acceptable as security for the supplier's obligation.
2. Clause 7-2, Additional Bond Security, must be included in all contracts
for which a bond is required.
7.1.9.b Corporate Sureties. Any corporate surety offered for a bond furnished the
Postal Service must appear on the list contained in Treasury Department
Circular 570. The amount of the bond may not exceed the underwriting limit
stated for the surety in that list.
7.1.9.c Individual Sureties. The Postal Service does not accept individual sureties.
7.1.9.d Deposit of Assets Instead of Surety Bonds
1. In lieu of any bond (other than a payment bond for a construction
contract), the supplier may deposit certain kinds of assets with the
Postal Service instead of furnishing a bond.
2. The only assets acceptable in place of a surety bond are described
below:
(a) United States bonds or notes with a maturity date less than 5
years from the date of the contract, together with an agreement
authorizing collection or sale in the event of default. The par value
of the bonds or notes must be at least equal to the penal amount
of the bond.
(b) A certified check, cashier's check, bank draft, postal money order,
or currency. The deposit must be at least equal to the penal
amount of the surety bond, and payable solely to the order of the
Untied States Postal Service.
3. The contracting officer must deposit currency, checks, and drafts with
the information service center, with instructions to hold the funds for the
benefit of the supplier. A perpetual inventory of all deposited items must
be kept by the senior contracting official at the purchasing office.
4. When the supplier pledges assets instead of providing a surety bond,
the supplier must complete the bond form as principal, and the bond
form must describe the assets pledged.
5. For all purchases involving the furnishing of bonds (other than payment
bonds for construction contracts), include Provision 7-4, Deposit of
Assets Requirements, in the solicitation.
6. Include Clause 7-3, Deposit of Assets Instead of Surety Bonds, in every
contract requiring a bond for which assets may be deposited in lieu of
bonds.
7.1.9.e Irrevocable Letters of Credit
1. Any person required to furnish a bond has the option to furnish a bond
secured by an ILC in an amount equal to the penal sum required to be
secured. A separate ILC is required for each bond.
2. The ILC must be irrevocable, unconditional, expire only as provided in
paragraph 6 below, and be issued by an acceptable federally insured
financial institution. ILCs over $5 million must be confirmed by another
acceptable financial institution that had letter of credit business of at
least $25 million in the past year.
3. To draw on the ILC, the contracting officer will use a sight draft and
present it with the ILC to the issuing financial institution or the
confirming financial institution (if any).
4. If the supplier does not furnish an acceptable ILC, or other acceptable
substitute, at least 30 days before an ILC's scheduled expiration, the
contracting officer shall immediately draw on the ILC.
5. If, after the period of performance of a contract where ILCs are used to
support payment bonds, there are outstanding claims against the
payment bond, the contracting officer will draw on the ILC prior to the
expiration date of the ILC to cover these claims.
6. Expiration dates will be established as follows:
(a) For construction contracts subject to the provisions of the Miller
Act, the later of:
(1) One year following the expected date of final payment;
(2) For performance bonds only, until completion of any
warranty period; or
(3) For payment bonds only, until resolution of all claims filed
against the performance bond during the one-year period
following final payment.
(b) For other contracts not subject to the Miller Act, the later of:
(1) 90 days following final payment; or
(2) Until completion of any warranty period for performance
bonds only.
7. The ILC must be issued or confirmed by a federally insured financial
institution rated investment grade or better.
(a) The supplier shall provide the contracting officer a credit rating
that indicates the financial institution has the required rating(s) as
of the date of issuance of the ILC.
(b) If the contracting officer learns that a financial institution's ratings
has dropped below the required level, the contracting officer will
give the supplier 30 days to substitute an acceptable ILC or will
draw on the ILC using a sight draft.
8. When the contract performance period is extended, the contracting
officer will require the supplier to provide an ILC with an appropriately
extended maturity that meets the requirements of 7.1.9.e.6 above.
7.1.10.a Information and Notice to Sureties
1. Correspondence. A copy of all correspondence relating to contract
modification, termination, renewal, or nonperformance must be
provided to each surety, with proof of delivery requested. Additional
information on contract performance and payment must be provided to
sureties upon request.
2. Furnishing Information to Subcontractors and Suppliers. When a
payment bond has been provided, the contracting officer may furnish
the name and address of the surety or sureties to persons who have
furnished, or have been requested to furnish, labor or materials for use
in performing the contract. The contracting officer may furnish
additional general information on such matters as the progress of the
work, the payments made, and the estimated percentage of
completion.
3. Failure to Perform. The contracting officer must send each surety a
copy of any notice of impending termination, demand for adequate
assurances, assessment of liquidated or other damages, or other
formal notice of failure to perform under the contract, with a notice that
the surety may be liable for damages suffered by the Postal Service.
4. Claims Against Sureties. If a supplier's failure to perform necessitates a
claim against a surety, the contracting officer must give the surety
written notice of the amount of and reasons for the claim. If the surety
refuses to pay or does not respond, the contracting officer must obtain
procedural assistance from assigned counsel. The contracting officer
will only authorize payment from an ILC (or any other cash equivalent
security) upon a judicial determination of the rights of the parties, a
signed notarized statement by the supplier that the payment is due and
owed, or a signed agreement between parties as to the amount due
and owed.
7.1.10.b Surety Takeover Agreements
1. Because of the surety's liability for damages resulting from a supplier's
default, the surety has certain rights and interests in the completion of
the contract work and the application of any undisbursed funds. Before
terminating a contract for default, the contracting officer must consider
any proposal by the surety for completion of the work. The surety
should be permitted to complete the work unless the contracting officer
has reason to believe that the persons or firms proposed by the surety
to complete the work are not competent or qualified.
2. Because of the possibility of conflicting demands for the defaulting
supplier's unpaid earnings (including retained percentages and unpaid
progress payments), the surety may condition its offer of completion
upon the execution of a takeover agreement establishing the surety's
right to payment from the unpaid earnings. If so, and with the
concurrence of the Vice President, Supply Management, the
contracting officer may enter into such an agreement with the surety in
writing after the effective date of contract termination. The contracting
officer should consider including the defaulting supplier as a party to the
agreement in order to preclude any disagreement on the supplier's
residual rights.
3. The agreement must provide that the surety will complete the work
according to all contract terms and conditions, and that the Postal
Service will pay the surety the balance of the contract price unpaid at
termination, but not more than the surety's costs and expenses, subject
to the following conditions:
(a) Any unpaid earnings of the defaulting supplier, including retained
percentages and progress payments for work accomplished
before termination, are subject to debts owed the Postal Service
by the supplier, except to the extent that the unpaid earnings are
required to pay the completing surety the actual costs and
expenses it incurs in completing the work, exclusive of the
surety's payments and obligations under the payment bond given
in connection with the contract.
(b) The agreement may not waive or release the Postal Service's
right to liquidated damages for any delay in completion of the
work that is not excusable under the contract.
(c) If the contract proceeds have been assigned to a financing
institution, the surety may not be paid from unpaid earnings
unless the assignee consents to the payment in writing.
(d) The surety may be reimbursed for discharging its liabilities under
the payment bond of the defaulting supplier only when:
(1) There is mutual agreement among the Postal Service, the
defaulting supplier, and the surety;
(2) The Postal Service Board of Contract Appeals makes a
final determination of the amount due; or
(3) A court of competent jurisdiction orders payment.
7.1.10.c Contract Completion
1. Upon supplier completion of all contract obligations, the contracting
officer must issue a Certificate of Completion to any surety. The
certificate's terms may not release the surety from any obligation under
a payment bond.
2. When the supplier has deposited assets instead of providing a surety
on a payment bond, the contracting officer must refund the assets, with
accrued interest, within 90 days after final completion of contract
performance, unless notice of a claim is received during the 90-day
period. If a claim is received, the assets may be released only with the
agreement of the claimant or by order of a court of competent
jurisdiction.
3. Assets deposited to secure any other bond may be refunded, with
accrued interest, upon final completion and receipt of the supplier's
release (see 6.4.3.c).
4. Upon request, the contracting officer will furnish a Certificate of
Substantial Completion to sureties of a construction supplier if the
project is substantially complete (usable for the purpose intended). If
the contracting officer is uncertain whether the project is substantially
complete, the advice of assigned counsel must be obtained.
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