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    Should the Government pay more for than what the bonds cost? Can you tell me where to find this answer as the Contractor wants us to pay them more that what the bonds cost and I am refusing, as I will only pay what they paid and not more?


    Answer

    Unless there is a CLIN on the contract for paying bond cost, this cost should be paid out of the contractor's G&A in a FFP environment. 

    Thus, this answers assumes that you have a CLIN on your contract for the bond.  Additionally, the assumption is that this CLIN is for a reimbursable CLIN which does not specify whether profit or fee is applied.

    This answer was taken from an answer to a previous AAP question (#120260) answered 1 July 2014 by another professor.
     
    In short, we found NO express prohibition on applying overhead and profit to bonding or surety costs on a construction contracts at the Federal Statute (U.S.C.) level or any precedents from Federal Courts, Contracting Boards, or from Comptroller General (GAO) decisions.
     
    That said, we have found instances where Government Agencies, including DoD, have prevented contractors from applying O/H and/or profit to bonding costs.
     

    For your scenario, it is likely going to be up to your negotiation skills to keep from applying O/H and/or profit to bonding costs in your resultant contract.  We provide the following to help you in that regard.
     
    As you know, bonding costs are definitely allowable in accordance with FAR 31.205-4.  If yours is a fixed price contract then the following clause (52.232-5) states how the government will treat bond premiums.  Note that although this clause implies the government will only “reimburse” these costs, it does not expressly disallow the government from also paying O/H or profit on those. 

    52.232-5 Payments under Fixed-Price Construction Contracts (May 2014)
    (g) Reimbursement for bond premiums. In making these progress payments, the Government shall, upon request, reimburse the Contractor for the amount of premiums paid for performance and payment bonds (including coinsurance and reinsurance agreements, when applicable) after the Contractor has furnished evidence of full payment to the surety. The retainage provisions in paragraph (e) of this clause shall not apply to that portion of progress payments attributable to bond premiums.
    In practical application, bond premium reimbursement is often the first stand-alone CLIN on a construction contract, if applicable, without associated O/H and/or profit.
     
    So now we have to review the guidance on profit to deconstruct if bonding costs should or can be included in the base for profit and/or overhead.  These are (bold is for emphasis added):
     

    - FAR 15.404-4 Profit
    - DFARS 215.404-4(b)(1) ”…Contracting officers shall use a structured approach…”
    (The DoD structured approach is the DD Form 1547, Record of Weighted Guidelines Method Application)
    - DFARS 215.404-4(c)(2)(C)(1)(ii)
    (The “…Contracting Officer may use an alternative structured approach (see 215.404-73) when the contract action is for architect-engineer or construction work”)
    DFARS 215.404-73 Alternate structured approaches -- (b)(1) The contracting officer may design the structure of the alternate, but it shall include consideration of the three basic components of profit--performance risk, contract type risk (including working capital), and facilities capital employed.
     
    Adequate price competition is normally the reason contractors do not include O/H or profit on bonding costs in their proposal.  In instances like a sole-source or limited competition or when negotiating modifications to construction contracts, the authority to “design” the alternate structured approach is where agencies have attempted (successfully) to prohibit O/H and profit from bonding costs.  A few examples of this are as follows:
     

    1.  DoD - Navy, the NAVFAC Acquisition Supplement (NFAS), NFAS 15.404-73-100, requires the use of the NAVFAC Form 4330/43 (8/88) for contractors to develop proposals.  The calculations in this form exclude O/H and profit on bonding costs.  The Army Corps of Engineers has a similar form and instructions which exclude O/H and profit on bonding costs.
     
    2.  The General Services Administration Acquisition Supplement GSAM, clause 552.243-71 Equitable Adjustments (Jan 2009).  552.243-71(h) does not allow for O/H or profit to be calculated on bond amounts if they are calculated via a “markup” as opposed to a direct cost.  Note this scenario is for negotiating equitable adjustments on contracts and not initial award.
     
    There may be other examples in other agencies as well.
     

    In conclusion, because bonding costs are either a direct cost or indirect cost and do not fall within the category of facilities capital employed, then there is no express prohibition on including profit to bonding costs when calculating profit using a structured or alternate structured approach.  As stated above, it is a matter of negotiation skills as to whether or not the final contract should authorize it.

     
    RESEARCH:  In addition to the FAR, DFARS and other agency FAR supplements cited above, additional research included the following:
    a) 40 USC Chapter 31 – the Miller Act - SUBCHAPTER III—BONDS - § 3131. Bonds of contractors of public buildings or works
    b) GAO Red Book – Principles of Appropriations Law, Third Edition, Volumes II and III
    c) Cost Accounting Standards
    d) DCAA Contract Audit Manual
     



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