[Federal Register Volume 62, Number 163 (Friday, August 22, 1997)]
[Rules and Regulations]
[Pages 44805-44808]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-21488]
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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: iccpub@interport.net
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]
BILLING CODE 6820-EP-P
