Government Contracting Database
Individual Sureties – Limits on Use
Tough restrictions on the acceptability of bonds supported by individual sureties protect both the government and suppliers under government contracts.
The Federal Acquisition Regulations, as amended by Federal Acquisition Circular 84-53, which was effective February 26, 1990; provide that rather than simply listing their assets, liabilities and net worth, an individual surety must pledge specific assets with a value equal to the bond’s penal amount. The bond then may be accepted only if the individual surety provides to the government a security interest in the pledged assets. See FAR 28-203.
The regulations strictly limit the types of assets which an individual surety may pledge in support of its bond obligations, based upon a standard of identifiable value and ready marketability. Acceptable assets, therefore, include (1) cash or certificates of deposit; (2) U.S. Government securities at market value; (3) stocks and bonds actively traded on a national U.S. security exchange with certificates issued in the name of the individual surety. Stock options and stocks on the over-the-counter (OTC) market or NASDA exchange will not be accepted. These assets will be valued at 90 percent of their 52-week low, as reflected at the time of submission of the bond; (4) real property owned by the surety and valued at either 100 percent of the current tax assessment or 75 percent of the property’s unencumbered market value provided a current appraisal is furnished; and (5) invocable letters of credit issued by a federally insured financial institution. See FAR 28-203-2
In accepting such assets, the government will require objective evidence of assets ownership and sufficient unencumbered value. Types of assets which have been proven inadequate in the past have been expressly prohibited by the new regulations. Thus, unacceptable assets include (1) notes or accounts receivables; (2) foreign securities; (3) stocks and bonds owned by the surety in a controlled, affiliated or closely held concern of the offerers/contractor; (4) corporate assets, including plant and equipment; (5) speculative assets such as mineral rights; (6) real property which is either located outside of the United States or serves as a principal residence of the surety; (7) personal property other than that specifically listed; and (8) letters of credit. The government’s objective is to eliminate assets which are not readily marketable and therefore offer merely illusory protection. See FAR 28-203-2
In addition to pledging acceptable assets, an individual surety must provide to the government a security interest in the assets at the time of furnishing the bond. To pledge real estate, the surety must furnish a recorded lien, together with evidence of title and the amount of real estate taxes or others encumbrances on the property. Any other acceptable assets which a surety chooses to pledge in support of a bond must be placed in an escrow account with a federally insured financial institution. See FAR 28-203-3
The escrow account established by the surety must incorporate times and conditions acceptable to the contracting officer. At a minimum, it must provide the contracting officer the sole and unrestricted right to draw upon all or any part of the funds deposited and absolve the government from liability for any costs attributable to the establishment or maintenance of the account. Similarly, the terms of the escrow account cannot be amended without the contracting officer’s consent. See FAR 28-203-1
Under the regulations, the contracting officer may release a portion of the surety’s assets pledged in support of the performance bond upon “substantial performance” of the contractor’s obligations. Release of the security interest with regard to the payment bond is much more restrictive and depends on whether the contract is subject to the Miller Act. In any event, the assets pledged in support of a payment bond may be released to a subcontractor or supplier upon government receipt of a court judgment on the bond. These provisions ensure that assets will be available to protect a subcontractor or supplier with a valid cause of action on a payment bond. See FAR 28-203-5
The extreme limitations which these regulations place on the use of individual sureties can severely restrict the availability of this option for many small business contractors. Moreover, contractors which submit bid guarantees supported by an individual surety must be aware that the contracting officer will reject the contractor as nonresponsible where these new bonding requirements are not met. In the case of a small business offeror, a contracting officer’s finding of nonresponsibility based on the unacceptability of an individual surety is final and need not be referred to the Small Business Administration.
Updated: June 28, 2018