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  • Question

    If the expiration date on a performance bond has expired before the contract period of performance, is the contractor required to secure a replacement bond with a current expiration date?


    Answer

    It is unclear based on the background information provided how the performance bond was secured, what is your contract type and which clauses are included in the contract in question.  Therefore, the answer could be different based on your specific circumstances.  First and foremost consultation with legal counsel is highly recommended. 

    Second, the FAR does not specifically address expiration dates on the bond itself and enforceability or lack thereof.  However, the SF 25 Performance Bonds includes the following language in the form:

    THEREFORE: The above obligation is void if the Principal- (a) (1) Performs and fulfills all the understanding, covenants, terms, conditions, and agreements of the contract during the original term of the contract and any extensions thereof that are granted by the Government, with or without notice of the Surety(ies) and during the life of any guaranty required under the contract, and (2) Performs and fulfills all the undertakings, covenants, terms, conditions, and agreements of any and all duly authorized modifications of the contract that hereafter are made. Notice of those modifications to the Surety(ies) are waived. (b) Pays to the Government the full amount of the taxes imposed by the Government, if the said contract is subject to 41 USC Chapter 31, Subchapter III, Bonds, which are collected, deducted, or withheld from wages paid by the Principal in carrying out the construction contract with respect to which this bond is furnished.

    Moreover, the GAO has previously ruled in protest cases which involve the enforcement of payment and performance bonds that the  Contracting Officer (CO) has “unrestricted rights” to draw on the funds from the bond.   For example, in one case, the GAO determined that, “the CO is vested with a wide degree of discretion and business judgment in determining the acceptability of an individual surety and will not question such a determination so long as it is reasonable.” Jay Jackson & Assoc., B-271236.3, Sept. 10, 1996, 96-2 CPD ¶ 111 at 3.  

    Additionally the FAR provides some important and helpful information on the minimum coverage period for performance bonds in construction contracts.  An individual surety may be accepted only if a security interest in acceptable assets is provided to the government by the individual surety. FAR § 28.203-1(a).  One individual surety is adequate support for a bond, provided the unencumbered value of the assets pledged by that surety equals or exceeds the amount of the bond. FAR § 28.203(b).  The value at which the CO accepts the assets pledged must be equal to or greater than the aggregate penal amounts of the bonds required by the solicitation. FAR § 28.203-1(b).  Assets may be provided through an escrow account with a federally-insured financial institution in the name of the contracting agency and must, at a minimum, provide the contracting officer the sole and unrestricted right to draw upon all or any part of the funds deposited in the account and indicate that the terms of the escrow account cannot be amended without the consent of the CO. FAR § 28.203-1(b)(1)(i), (vi).  To satisfy the underlying bond obligations, the government will accept from individual sureties only acceptable assets, such as cash or irrevocable letters of credit, from a federally-insured financial institution. FAR § 28.203-2(a),  

    Additionally, when real property is used to secure the bond, FAR 28.203-5(a) requires for contracts subject to the Bonds Statute that the security interest shall be maintained for the later of-

                    (i)1 year following final payment;

                    (ii) Until completion of any warranty period (applicable only to performance bonds); or

                    (iii) Pending resolution of all claims filed against the payment bond during the 1-year period following final payment.

    These timelines also apply to bonds secured by irrevocable lines of credit (ILC).

    The FAR also does address expiration of performance bonds secured by irrevocable lines of credit (ILC).  ILCs expire only as provided in paragraph (f) of this subsection, and be issued/confirmed by an acceptable federally insured financial institution as provided in paragraph (g) of this subsection.(FAR 28.204-3(b)  FAR 28.20403(f) states the following:

    (f) The period for which financial security is required shall be as follows:

               (1)If used as a bid guarantee, the ILC should expire no earlier than 60 days after the close of the bid acceptance period.

               (2)If used as an alternative to corporate or individual sureties as security for a performance or payment bond, the offeror/contractor may submit an ILC with an initial expiration date estimated to cover the entire period for which financial security is required or an ILC with an initial expiration date that is a minimum period of one year from the date of issuance. The ILC shall provide that, unless the issuer provides the beneficiary written notice of non-renewal at least 60 days in advance of the current expiration date, the ILC is automatically extended without amendment for oneyear from the expiration date, or any future expiration date, until the period of required coverage is completed and the contracting officer provides the financial institution with a written statement waiving the right to payment.

    Therefore, the GAO has ruled that the CO has “unrestricted rights” to draw on funds rom the bond.  Also, the SF 25 and the FAR make pretty clear that the performance and payment bonds for the contract must cover the period of performance including any warranty period and settlement of claims as required by the contract.   Additionally, for performance bond secured with an ILC, the expiration date automatically extends unless the issuer provided written notice of non-renewal 60 days in advance.  In this case, no renewal of the bond would be required according to the FAR.  Once again, I strongly recommend consulting your attorney to fully ascertain the legal implications of the expiration date expiring on the performance bond.

    Finally, there are several previously submitted Ask-a-professor (AAPs) questions and answers on the topic of payment and performance bonds.  I encourage you to review some of these previous AAPs, and in particular, take a look at these two which look relevant to your topic: AAP ID #7587 entitled Payment and Performance Bonds Retention Period (https://www.dau.edu/aap/pages/home.aspx#!details|7587) and AAP ID #10049 entitled Warranty and Performance Bonds (https://www.dau.edu/aap/pages/home.aspx#!details|10049).

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