7-3 Bonds, Insurance, and Taxes

7-3.1 Bonds

A bond is 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. Bonds (other than bonds required for construction contracts) and performance guarantees should only be obtained when needed to protect the interest of the Postal Service. The purchase plan must describe and explain any requirements for bonds and performance guarantees.

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. The surety is an individual or corporation legally liable for another’s debt, default, or failure to satisfy a contractual obligation. Clause 7-2: Additional Bond Security must be included in all contracts for which a bond is required.

There are several kinds of bonds used by the Postal Service:

7-3.1.1 Annual Bonds

Annual bonds are 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.

7-3.1.2 Patent Infringement Bonds

Patent infringement bonds are given as security for a supplier’s obligations under a patent clause. 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.

7-3.1.3 Fidelity Bonds

A fidelity bond is used 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. 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 RFP, and the amount must be reviewed periodically to ensure that the Postal Service’s interest is adequately protected.

7-3.1.4 Contract Postal Unit Bonds

Contract Postal Unit bonds impose obligations on a supplier similar to those required under performance, payment, and fidelity bonds.

7-3.1.5 Performance Bonds

A performance bond is a bond given as security for the supplier’s obligations under a contract. Performance bonds may be required when the contracting officer and the Purchase/SCM Team determines that performance bonding is essential to protect the interest of the Postal Service. Examples of situations that require performance bonds include:

The penal amount of the performance bond must be the minimum needed to protect the Postal Service’s interest. A penal amount is 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. If it is determined that performance bonding is essential to the interest of the Postal Service, Provision 7-1: Performance Bond Requirements should be included in the RFPs for non-construction contracts. If the penal amount is less than 100% of the contract price, the provision must be modified accordingly.

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.

7-3.1.6 Payment Bonds

A payment bond assures payment of all persons supplying labor and material under a contract. Payment bonds are required when the contracting officer and the Purchase/SCM Team determines that payment bonding is essential to protect the interest of the Postal Service. Examples of situations that require payment bonds include:

The penal amount of the payment bond must be the minimum needed to protect the Postal Service’s interest. If it is determined that payment bonding is essential to the interest of the Postal Service, Provision 7-2: Payment Bond Requirements should be included in RFPs for non-construction contracts.

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.

7-3.1.7 Performance and Payment Bonds for Construction Contracts

7-3.1.7.a Miller Act. The Miller Act (see the Laws section) requires contract surety bonds in the form of performance and payment bonds for construction contracts valued at more than $100,000.

7-3.1.7.b Contracts Exceeding $100,000

The amount of the payment bond must be no less than the amount of the performance bond.

“Original contract price” means the awarded price of the contract. For requirements contracts it means the price payable for the estimated total quantity to be ordered, and for indefinite-delivery contracts it means the price payable for the specified contract minimum quantity. Original contract price does not include the price of any options, except those options exercised at the time of contract award.

Note: Do not include Provision 7-1: Performance Bond Requirements and Provision 7-2: Payment Bond Requirements when a determination has been made that bonds are not required.

7-3.1.7.c Contracts Valued at $100,000 and Less

A payment bond or an alternative payment protection plan is not required for a construction contract valued at $100,000 or less.

7-3.1.8 Deposit of Assets Instead of Surety Bonds

In lieu of any bond (other than performance or payment bond for construction contracts), the supplier may put on deposit specific types of assets with the Postal Service instead of furnishing a bond.

The only assets acceptable in place of a surety bond are:

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. The contracting officer must deposit currency, checks, and drafts with the appropriate accounting service center (ASC), with instructions to hold the funds for the benefit of the supplier. An inventory of the items deposited with the ASC must be maintained by the contracting officer and kept as a required component of the contract file.

For all purchases involving the furnishing of a bond (other than payment bonds for construction contracts), include Provision 7-4: Deposit of Assets Requirements in the RFP. Clause 7-3: Deposit of Assets Instead of Surety Bonds must be included in every contract requiring a bond for which assets may be deposited in lieu of bonds.

7-3.1.9 Execution of Bonds

Prescribed formats for bonds, as well as guidance and procedures, can be found in the relevant handbook. 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.

An original signed copy of any bond must be retained in the RFP and contract file. 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.

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.

Unless an annual bond is accepted, performance or payment bonds must be dated after the date of the contract.

7-3.1.10 Consent of Surety

Consent of surety is an acknowledgment by a surety that its bond continues to apply to the contract as modified. When a contract modification increases the contract price, the supplier and the surety must execute a consent of surety to 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.

When an increased bond amount is obtained from a party other than the original surety, the original surety must execute a consent of surety. Novation agreements require the execution of a consent of surety.

7-3.1.11 Acceptable Sureties

The Postal Service does not accept individual sureties. Bonds must be supported by acceptable corporate sureties, or by assets acceptable as security for the supplier’s obligation. 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.

7-3.1.12 Irrevocable Letter of Credit

An ILC is 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.

Any offeror or supplier 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. The ILC must be irrevocable, unconditional, expire only 90 days following final payment or until completion of any warranty period for performance bonds only, 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.

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). 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. 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.

The ILC must be issued or confirmed by a federally insured financial institution rated investment grade or better. 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. 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.

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 expiration requirements of 90 days following final payment; or until completion of any warranty period for performance bonds only.

7-3.1.13 Contract Management

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.

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.

7-3.1.14 Failure to Perform

If there is a 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.

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 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.

7-3.1.15 Surety Takeover Agreements

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.

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 VP, SM, 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.

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:

7-3.1.16 Contract Completion

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. 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.

Assets deposited to secure any other bond may be refunded, with accrued interest, upon final completion and receipt of the supplier’s release. 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 Assigned counsel must be obtained.