Federal Acquisition Regulation; Irrevocable Letters of Credit and Alternatives to Miller Act Bonds

DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 1, 28, and 52

[FAC 97-01; FAR Case 95-301; Item III]

RIN 9000-AG99

Federal Acquisition Regulation; Irrevocable Letters of Credit and

Alternatives to Miller Act Bonds

AGENCIES: Department of Defense (DoD), General Services Administration

(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Interim rule adopted as final with changes.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense

Acquisition Regulations Council have agreed to adopt as final, with

changes, the interim rule published as Item XVII of Federal Acquisition

Circular 90-39 on June 20, 1996. The rule amends the Federal

Acquisition Regulation (FAR) to address the use of irrevocable letters

of credit in lieu of surety on Miller Act bonds (OFPP Policy Letter 91-

4) and alternatives to Miller Act Bonds, as required by Section 4101(b)

of the Federal Acquisition Streamlining Act of 1994 (FASA) (Pub. L.

103-355). This regulatory action was not subject to Office of

Management and Budget review under Executive Order 12866, dated

September 30, 1993, and is not a major rule under 5 U.S.C. 804.

DATE: Effective October 21, 1997.

FOR FURTHER INFORMATION CONTACT: The FAR Secretariat, Room 4035, GS

Building, Washington, DC 20405 (202) 501-4755 for information

pertaining to status or publication schedules. For clarification of

content, contact Mr. Jack O'Neill, Procurement Analyst, at (202) 501-

3856. Please cite FAC 97-01, FAR case 95-301.

SUPPLEMENTARY INFORMATION:

A. Background

This final rule amends FAR Parts 1, 28, and 52 to provide for use

of Irrevocable Letters of Credit as substitutes for corporate or

individual surety on Miller Act bonds, and provides alternatives to

Miller Act payment bonds for construction contracts valued at $25,000

to $100,000, which are no longer subject to the Miller Act, in

accordance with Section 4104(b)(1) of FASA. An interim rule with

request for comment was published in the Federal Register on June 20,

1996 (61 FR 31651). Comments were received from seven respondents. The

final rule includes the following changes in response to public

comments:

Update of the references to reflect the current version of

the Uniform Customs and Practice for Documentary Credits.

Amendment of the definition of Irrevocable Letter of

Credit (ILC). Deletion of application of the term ``unconditional'' to

ILCs.

Incorporation of requirements for a specific expiration

date for ILCs used in lieu of surety on performance or payment bonds,

with automatic extension for one-year periods, until the contracting

officer notifies the financial institution that the Government is

waiving the right to payment.

Limitation of the requirement for confirmation of ILCs

over $5 million to those issued by financial institutions that had

letter of credit business of less than $25 million in the past year.

Incorporation of an explicit requirement for credit rating

service to be as specified in Office of Federal Procurement Policy

Pamphlet No. 7.

Amendment of the clause at 52.228-13, Alternative Payment

Protections, to specify the amount of payment protection as 50 percent

of the contract price, and to require payment protection within a

certain number of days after contract award.

The Councils did not adopt a comment which recommended a change in

the expiration date for ILCs from 60 to 75 days after the close of the

bid acceptance period, as the comment appeared to be based on a

misinterpretation of the rule. The recommended 75-day expiration period

was based on the need for 60 days to cover the bid acceptance period,

plus 10 days to cover the time necessary for submission of payment and

performance bonds, and 5 additional days to cover mailing time.

However, as written, the rule provides for 60 days in addition to the

number of days required for the bid acceptance period; i.e., if the bid

acceptance period is 60 days, the rule requires the ILC to cover a

total of 120 days before expiration.

B. Regulatory Flexibility Act

The final rule is expected to have a significant positive economic

impact on a substantial number of small entities within the meaning of

the Regulatory Flexibility Act, 5 U.S.C. 601 et seq., because the rule

provides alternatives to Miller Act bonds for construction contracts

between $25,000 and $100,000, which may be beneficial to

[[Page 44806]]

construction contractors. A Final Regulatory Flexibility Analysis

(FRFA) has, therefore, been prepared and will be provided to the Chief

Counsel for Advocacy of the Small Business Administration. A copy of

the FRFA may be obtained from the FAR Secretariat. The analysis is

summarized as follows:

This rule will apply to all businesses, large and small, which

contract with the Government for construction. The objective is to

make it easier for small construction contractors to provide payment

protection, by providing alternatives for construction contracts

valued between $25,000 and $100,000. In addition, the rule permits

the use of Irrevocable Letters of Credit as security for Miller Act

bonds, in lieu of corporate or individual sureties. The rule imposes

no new recordkeeping or reporting requirements, and provides

alternatives to Miller Act payment bonds for construction contracts

which do not exceed $100,000.

C. Paperwork Reduction Act

This rule will reduce the information collection requirements which

the Office of Management and Budget (OMB) previously approved under 44

U.S.C. 3501, et seq. (OMB Control No. 9000-0045). The rule will reduce

the number of respondents and responses by identifying and correcting

an overlap in reporting of performance and payment and bid bonds.

List of Subjects in 48 CFR Parts 1, 28, and 52

Government procurement.

Dated: August 7, 1997.

Edward C. Loeb,

Director, Federal Acquisition Policy Division.

Accordingly, the interim rule amending 48 CFR Parts 28 and 52 which

was published at 61 FR 31651, June 20, 1996, is adopted as final with

changes as set forth below:

1. The authority citation for 48 CFR Parts 1, 28, and 52 continues

to read as follows:

Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42

U.S.C. 2473(c).

PART 1--FEDERAL ACQUISITION REGULATIONS SYSTEM

2. The table in section 1.106 is amended by removing the entries

for 28.106-1(b) and 52.228-3; revising the entry for 52.228-2; and

adding entries in numerical order to read as follows:

1.106 OMB Approval under the Paperwork Reduction Act.

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FAR segment OMB control No.

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* * * * *

28.106-1(e)....................... 9000-0001

28.106-1(n)....................... 9000-0119

* * * * *

52.228-2.......................... 9000-0045 and 9000-0119

52.228-13......................... 9000-0045

52.228-15......................... 9000-0045

52.228-16......................... 9000-0045 and 9000-0119

* * * * *

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PART 28--BONDS AND INSURANCE

3. Section 28.000 is revised to read as follows:

28.000 Scope of part.

This part prescribes requirements for obtaining financial

protection against losses under sealed bid and negotiated contracts. It

covers bid guarantees, bonds, alternative payment protections, security

for bonds, and insurance. The terms ``bid'' and ``bidders'' include

``proposal'' and ``offerors.''

4. Section 28.001 is amended by revising the definitions for

``Irrevocable letter of credit'' and ``Penal sum'' to read as follows:

28.001 Definitions.

* * * * *

Irrevocable letter of credit (ILC) means a written commitment by a

federally insured financial institution to pay all or part of a stated

amount of money until the expiration date of the letter, upon

presentation by the Government (the beneficiary) of a written demand

therefor. Neither the financial institution nor the offeror/contractor

can revoke or condition the letter of credit.

Penal sum or penal amount means the amount of money specified in a

bond (or a percentage of the bid price in a bid bond) as the maximum

payment for which the surety is obligated or the amount of security

required to be pledged to the Government in lieu of a corporate or

individual surety for the bond.

* * * * *

Subpart 28.1--Bonds and Other Financial Protections

5. The heading of Subpart 28.1 is revised to read as set forth

above.

6. Section 28.100 is revised to read as follows:

28.100 Scope of subpart.

This subpart prescribes requirements and procedures for the use of

bonds, alternative payment protections, and all types of bid

guarantees.

7. Section 28.102-2 is amended by revising the introductory text of

paragraph (b)(1) and paragraphs (b)(2), (c)(1), and (c)(2) to read as

follows:

28.102-2 Amount required.

* * * * *

(b) * * * (1) The penal amount of payment bonds or the amount of

alternative payment protection shall equal--

* * * * *

(2) If the original contract price is $5 million or less, the

Government may require additional protection if the contract price is

increased.

(i) The penal amount of the total protection as revised shall meet

the requirement of paragraph (b)(1) of this subsection.

(ii) The Government shall secure the required additional protection

by directing the contractor to increase the penal sum of the existing

bond or to obtain an additional bond, or to furnish additional

alternative payment protection.

* * * * *

(c) * * * (1) When determining the penal sum of bonds or the amount

of alternative payment protection for requirements contracts, the

contracting officer shall consider the contract price to be the price

payable for the estimated quantity.

(2) When determining the penal sum of bonds or the amount of

alternative payment protection for indefinite-quantity contracts, the

contracting officer shall consider the contract price to be the price

payable for the specified minimum quantity. When the minimum quantity

is exceeded, paragraphs (a)(2) and (b)(2) of this subsection apply.

* * * * *

8. Section 28.102-3 is amended by revising the section heading and

the last sentence of paragraph (b) to read as follows:

28.102-3 Contract clauses.

* * * * *

(b) * * * Complete the clause by specifying the payment protections

selected (see 28.102-1(b)(1)) and the deadline for submission.

9. Section 28.106-3 is revised to read as follows:

28.106-3 Additional bond and security.

(a) When additional bond coverage is required and is secured in

whole or in part by the original surety or sureties, agencies shall use

Standard Form 1415,

[[Page 44807]]

Consent of Surety and Increase of Penalty. Standard Form 1415 is

authorized for local reproduction, and a copy of the form is furnished

for this purpose in part 53 of the looseleaf edition of the FAR.

(b) When additional bond coverage is required and is secured in

whole or in part by a new surety or by one of the alternatives

described in 28.204 in lieu of corporate or individual surety, agencies

shall use Standard Form 25, Performance Bond; Standard Form 1418,

Performance Bond for Other Than Construction Contracts; Standard Form

25-A, Payment Bond; or Standard Form 1416, Payment Bond for Other Than

Construction Contracts.

10. Section 28.106-8 is revised to read as follows:

28.106-8 Payment to subcontractors or suppliers.

The contracting officer will only authorize payment to

subcontractors or suppliers 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 contractor that the payment is due

and owed, or a signed agreement between the parties as to amount due

and owed.

Subpart 28.2--Sureties and Other Security for Bonds

11. The heading of Subpart 28.2 is revised as set forth above.

12. Section 28.200 is revised to read as follows:

28.200 Scope of subpart.

This subpart prescribes procedures for the use of sureties and

other security to protect the Government from financial losses.

28.201 Requirements for security.

13. Section 28.201 is amended by revising the section heading as

set forth above, and in paragraph (b) by inserting the word ``other''

after ``or'' the first time it appears.

14. Section 28.204 is amended in paragraph (a) by revising the

second sentence to read as follows:

28.204 Alternatives in lieu of corporate or individual sureties.

(a) * * * When any of those types of security are deposited, a

statement shall be incorporated in the bond form pledging the security

in lieu of execution of the bond form by corporate or individual

sureties. * * *

* * * * *

15. Section 28.204-3 is amended by revising paragraphs (b), (c),

(f) introductory text, (f)(2) introductory text, (f)(2)(ii)(B), (g)

introductory text, (g)(1) and (h) to read as follows:

28.204-3 Irrevocable letter of credit (ILC).

* * * * *

(b) The ILC shall be irrevocable, require presentation of no

document other than a written demand and the ILC (and letter of

confirmation, if any), 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.

(c) To draw on the ILC, the contracting officer shall use the sight

draft set forth in the clause at 52.228-14, and present it with the ILC

(including letter of confirmation, if any) to the issuing financial

institution or the confirming financial institution (if any).

* * * * *

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

follows:

* * * * *

(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 one year 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. The period of required coverage shall be:

* * * * *

(ii) * * *

(B) For performance bonds only, until completion of any warranty

period.

(g) Only federally insured financial institutions rated investment

grade or higher shall issue or confirm the ILC. Unless the financial

institution issuing the ILC had letter of credit business of at least

$25 million in the past year, 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.

(1) The offeror/contractor shall provide the contracting officer a

credit rating from a recognized commercial rating service as specified

in Office of Federal Procurement Policy Pamphlet No. 7 (see 28.204-

3(h)) that indicates the financial institution has the required

rating(s) as of the date of issuance of the ILC.

* * * * *

(h)(1) Additional information on credit rating services and

investment grade ratings is contained within Office of Federal

Procurement Policy Pamphlet No. 7, Use of Irrevocable Letters of

Credit. This pamphlet may be obtained by calling the Office of

Management and Budget's publications office at (202) 395-7332.

(2) A copy of the Uniform Customs and Practice (UCP) for

Documentary Credits, 1993 Revision, International Chamber of Commerce

Publication No. 500, is available from: ICC Publishing, Inc., 156 Fifth

Avenue, New York NY, 10010, Telephone: (212) 206-1150, Telefax: (212)

633-6025, E-mail: [email protected]

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

16. Section 52.228-2 is amended by revising the introductory text,

the clause date, and paragraph (d) to read as follows:

52.228-2 Additional Bond Security.

As prescribed in 28.106-4(a), insert the following clause:

Additional Bond Security (Oct 1997)

* * * * *

(d) An irrevocable letter of credit (ILC) used as security will

expire before the end of the period of required security. If the

Contractor does not furnish an acceptable extension or replacement

ILC, or other acceptable substitute, at least 30 days before an

ILC's scheduled expiration, the Contracting officer has the right to

immediately draw on the ILC.

(End of clause)

17. Section 52.228-13 is amended by revising the clause date and

paragraphs (b), (c) and (f) to read as follows:

52.228-13 Alternative Payment Protections.

* * * * *

Alternative Payment Protections (Oct 1997)

* * * * *

(b) The amount of the payment protection shall be 50 percent of

the contract price.

(c) The submission of the payment protection is required within

________ days of contract award.

* * * * *

(f) When a tripartite escrow agreement is used, the Contractor

shall utilize only suppliers of labor and material that signed the

escrow agreement.

(End of clause)

18. Section 52.228-14 is amended by revising:

[[Page 44808]]

(a) The clause date and paragraphs (a), (b), (c) introductory text,

(c)(2) introductory text, (c)(2)(ii)(B), and (d);

(b) Following paragraph (e) in the ``Irrevocable Letter of

Credit'', paragraphs 1, 2, 4, and 6; and

(c) Following paragraph (f) in the ILC confirmation, paragraphs 3,

4(a), and 6. The revised sections read as follows:

52.228-14 Irrevocable Letter of Credit.

* * * * *

Irrevocable Letter of Credit (Oct 1997)

(a) ``Irrevocable letter of credit'' (ILC), as used in this

clause, means a written commitment by a federally insured financial

institution to pay all or part of a stated amount of money, until

the expiration date of the letter, upon presentation by the

Government (the beneficiary) of a written demand therefor. Neither

the financial institution nor the offeror/Contractor can revoke or

condition the letter of credit.

(b) If the offeror intends to use an ILC in lieu of a bid bond,

or to secure other types of bonds such as performance and payment

bonds, the letter of credit and letter of confirmation formats in

paragraphs (e) and (f) of this clause shall be used.

(c) The letter of credit shall be irrevocable, shall require

presentation of no document other than a written demand and the ILC

(including confirming letter, if any), shall be issued/confirmed by

an acceptable federally insured financial institution as provided in

paragraph (d) of this clause, and--

* * * * *

(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 may submit 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 one year 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. The period of

required coverage shall be:

* * * * *

(ii) * * *

(B) For performance bonds only, until completion of any warranty

period.

(d) Only federally insured financial institutions rated

investment grade or higher shall issue or confirm the ILC. The

offeror/Contractor 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. Unless the

financial institution issuing the ILC had letter of credit business

of at least $25 million in the past year, 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.

(e) * * *

1. We hereby establish this irrevocable and transferable Letter

of Credit in your favor for one or more drawings up to United States

$________. This Letter of Credit is payable at [issuing financial

institution's and, if any, confirming financial institution's]

office at [issuing financial institution's address and, if any,

confirming financial institution's address] and expires with our

close of business on ________, or any automatically extended

expiration date.

2. We hereby undertake to honor your or the transferee's sight

draft(s) drawn on the issuing or, if any, the confirming financial

institution, for all or any part of this credit if presented with

this Letter of Credit and confirmation, if any, at the office

specified in paragraph 1 of this Letter of Credit on or before the

expiration date or any automatically extended expiration date.

* * * * *

4. This Letter of Credit is transferable. Transfers and

assignments of proceeds are to be effected without charge to either

the beneficiary or the transferee/assignee of proceeds. Such

transfer or assignment shall be only at the written direction of the

Government (the beneficiary) in a form satisfactory to the issuing

financial institution and the confirming financial institution, if

any.

* * * * *

6. If this credit expires during an interruption of business of

this financial institution as described in Article 17 of the UCP,

the financial institution specifically agrees to effect payment if

this credit is drawn against within 30 days after the resumption of

our business.

(f) * * *

3. We hereby undertake to honor sight draft(s) drawn under and

presented with the Letter of Credit and this Confirmation at our

offices as specified herein.

4. * * *

(a) At least 60 days prior to any such expiration date, we shall

notify the Contracting Officer, or the transferee and the issuing

financial institution, by registered mail or other receipted means

of delivery, that we elect not to consider this confirmation

extended for any such additional period; or

* * * * *

6. If this confirmation expires during an interruption of

business of this financial institution as described in Article 17 of

the UCP, we specifically agree to effect payment if this credit is

drawn against within 30 days after the resumption of our business.

* * * * *

(End of clause)

[FR Doc. 97-21488 Filed 8-21-97; 8:45 am]

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