A-78213, JULY 29, 1936, 16 COMP. GEN. 81

A-78213: Jul 29, 1936

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IN CONNECTION WITH WHICH THE MATTER OF SECURITY FOR PERFORMANCE IS COVERED BY THE BOND REQUIREMENTS OF THE ACT OF AUGUST 24. IN CASES WHERE IT IS ADMINISTRATIVELY DETERMINED THERE IS NEED FOR PERFORMANCE SECURITY. WHERE PERFORMANCE BONDS ARE REQUIRED BY THE ADVERTISED SPECIFICATIONS. THE GENERAL RULE IS THAT SUCH BOND MUST BE FURNISHED. THAT THERE SHOULD BE DEDUCTED FROM THE CONTRACT PRICE AN AMOUNT EQUAL TO A PERFORMANCE BOND PREMIUM WHERE SUCH BOND WAS REQUIRED BY THE SPECIFICATIONS AND NOT FURNISHED. IS NOT A GENERAL RULE. IS NOT FOR APPLICATION WHERE A BOND OF INDIVIDUAL SURETIES. ARE FURNISHED BY THE CONTRACTOR. AS FOLLOWS: REFERENCE IS MADE TO YOUR DECISION OF FEBRUARY 5. TO THE SECRETARY OF THE NAVY (15 C.G. 688) WHICH APPARENTLY IS TO THE EFFECT THAT WHEN THE ADVERTISED SPECIFICATIONS REQUIRE A PERFORMANCE BOND AND THE CONTRACTOR FURNISHES IN LIEU THEREOF PERFORMANCE GUARANTY IN SOME OTHER FORM.

A-78213, JULY 29, 1936, 16 COMP. GEN. 81

CONTRACTS - PERFORMANCE - BONDS - CONTRACT PRICE REDUCTION WHERE NOT FURNISHED - AUTHORIZED SUBSTITUTES IN OTHER THAN CONSTRUCTION CONTRACTS, IN CONNECTION WITH WHICH THE MATTER OF SECURITY FOR PERFORMANCE IS COVERED BY THE BOND REQUIREMENTS OF THE ACT OF AUGUST 24, 1935, 49 STAT. 793, PROSPECTIVE BIDDERS SHOULD BE NOTIFIED, IN CASES WHERE IT IS ADMINISTRATIVELY DETERMINED THERE IS NEED FOR PERFORMANCE SECURITY, THAT CASH DEPOSIT, CERTIFIED CHECK, OR PERFORMANCE BOND, MAY BE FURNISHED AT THEIR OPTION, BUT WHERE PERFORMANCE BONDS ARE REQUIRED BY THE ADVERTISED SPECIFICATIONS, THE GENERAL RULE IS THAT SUCH BOND MUST BE FURNISHED. THE RULE STATED IN 15 COMP. GEN. 688, THAT THERE SHOULD BE DEDUCTED FROM THE CONTRACT PRICE AN AMOUNT EQUAL TO A PERFORMANCE BOND PREMIUM WHERE SUCH BOND WAS REQUIRED BY THE SPECIFICATIONS AND NOT FURNISHED, IS NOT A GENERAL RULE, THE CONTRACTOR IN THAT CASE NOT HAVING FURNISHED EITHER CORPORATE SURETY OR AUTHORIZED SUBSTITUTE THEREFOR, AND IS NOT FOR APPLICATION WHERE A BOND OF INDIVIDUAL SURETIES, OR UNITED STATES BONDS AUTHORIZED TO BE ACCEPTED IN LIEU OF SURETY BONDS, ARE FURNISHED BY THE CONTRACTOR.

ACTING COMPTROLLER GENERAL ELLIOTT TO THE ADMINISTRATOR OF VETERANS' AFFAIRS, VETERANS' ADMINISTRATION, JULY 29, 1936:

THERE HAS BEEN CONSIDERED YOUR LETTER OF JULY 9, 1936, AS FOLLOWS:

REFERENCE IS MADE TO YOUR DECISION OF FEBRUARY 5, 1936, TO THE SECRETARY OF THE NAVY (15 C.G. 688) WHICH APPARENTLY IS TO THE EFFECT THAT WHEN THE ADVERTISED SPECIFICATIONS REQUIRE A PERFORMANCE BOND AND THE CONTRACTOR FURNISHES IN LIEU THEREOF PERFORMANCE GUARANTY IN SOME OTHER FORM, THERE SHOULD BE DEDUCTED FROM THE MONIES DUE THE CONTRACTOR AN AMOUNT EQUAL TO THE PREMIUM ON THE PERFORMANCE BOND WHICH SHOULD HAVE BEEN FURNISHED IN ACCORDANCE WITH THE TERMS OF THE ACCEPTED BID.

PARAGRAPH 9 OF STANDARD FORM 22 ENTITLED "STANDARD GOVERNMENT INSTRUCTIONS TO BIDDERS," APPROVED BY THE PRESIDENT NOVEMBER 19, 1926, STATES THAT--- TO DO BUSINESS, OR OF TWO RESPONSIBLE INDIVIDUAL SURETIES, WILL BE ACCEPTED AS SECURITY FOR ANY BID OR CONTRACT.'

SHALL THE DECISION SUPRA BE CONSTRUED TO MEAN THAT WHEN THE ADVERTISED SPECIFICATIONS REQUIRE A PERFORMANCE BOND THERE SHALL BE DEDUCTED FROM THE AMOUNT DUE UNDER THE CONTRACT AN AMOUNT EQUAL TO THE PREMIUM ON A SURETY COMPANY BOND IN THE EVENT THE CONTRACTOR ELECTS UNDER THE PROVISION OF PARAGRAPH 9 OF STANDARD FORM 22 TO FURNISH A BOND OF TWO RESPONSIBLE INDIVIDUAL SURETIES?

SECTION 1126 OF THE REVENUE ACT OF 1926, APPROVED FEBRUARY 26, 1926, AS AMENDED BY THE ACT OF FEBRUARY 4, 1935, WHICH IS QUOTED IN TREASURY DEPARTMENT CIRCULAR NO. 154 (REVISED), DATED FEBRUARY 6, 1935, THE SUBJECT OF WHICH IS "ACCEPTANCE OF BONDS, NOTES, OR OTHER OBLIGATIONS ISSUED OR GUARANTEED BY THE UNITED STATES AS SECURITY IN LIEU OF SURETY OR SURETIES ON PENAL ONDS" PROVIDES IN PART AS FOLLOWS:

"WHEREVER BY THE LAWS OF THE UNITED STATES OR REGULATIONS MADE PURSUANT THERETO, ANY PERSON IS REQUIRED TO FURNISH ANY RECOGNIZANCE, STIPULATION, BOND, GUARANTY, OR UNDERTAKING, HEREINAFTER CALLED "PENAL BOND," WITH SURETY OR SURETIES, SUCH PERSON MAY, IN LIEU OF SUCH SURETY OR SURETIES, DEPOSIT AS SECURITY WITH THE OFFICIAL HAVING AUTHORITY TO APPROVE SUCH PENAL BOND, UNITED STATES LIBERTY BONDS OR OTHER BONDS OR NOTES OF THE UNITED STATES IN A SUM EQUAL AT THEIR PAR VALUE TO THE AMOUNT OF SUCH PENAL BOND REQUIRED TO BE FURNISHED, TOGETHER WITH AN AGREEMENT AUTHORIZING SUCH OFFICIAL TO COLLECT OR SELL SUCH BONDS OR NOTES SO DEPOSITED IN CASE OF ANY DEFAULT IN THE PERFORMANCE OF ANY OF THE CONDITIONS OR STIPULATIONS OF SUCH PENAL BOND. THE ACCEPTANCE OF SUCH UNITED STATES BONDS OR NOTES IN LIEU OF SURETY OR SURETIES REQUIRED BY LAW SHALL HAVE THE SAME FORCE AND EFFECT AS INDIVIDUAL OR CORPORATE SURETIES, OR CERTIFIED CHECKS, BANK DRAFTS, POST-OFFICE MONEY ORDERS, OR CASH, FOR THE PENALTY OR AMOUNT OF SUCH PENAL BOND.'

SHALL THE DECISION SUPRA BE CONSTRUED TO MEAN THAT WHEN THE ADVERTISED SPECIFICATIONS REQUIRE A PERFORMANCE BOND AN AMOUNT EQUAL TO THE PREMIUM ON A SURETY COMPANY BOND SHALL BE DEDUCTED FROM THE CONTRACTOR'S ACCOUNT IN THE EVENT THE CONTRACTOR ELECTS TO FURNISH UNITED STATES LIBERTY BONDS OR OTHER BONDS OR NOTES OF THE UNITED STATES INSTEAD OF A SURETY COMPANY BOND NOTWITHSTANDING THE FACT THAT THE LAW AUTHORIZES THE ACCEPTANCE OF SUCH SECURITY IN LIEU OF PERFORMANCE BOND TO GUARANTEE FAITHFUL PERFORMANCE OF CONTRACT?

OCCASIONALLY A CONTRACTOR REQUESTS PERMISSION TO FURNISH A CERTIFIED CHECK OR CASH INSTEAD OF A PERFORMANCE BOND TO GUARANTEE FAITHFUL PERFORMANCE OF A CONTRACT, AND IT WILL BE APPRECIATED IF YOU WILL INDICATE THE CONDITIONS UNDER WHICH PERFORMANCE GUARANTY OF THIS CHARACTER MAY BE ACCEPTED.

APROPOS OF THIS MATTER IT APPEARS FROM THE DECISION SUPRA THAT THE TERM "PERFORMANCE BOND" HAS BEEN CONSTRUED TO MEAN THE BOND OF A SURETY COMPANY FOR WHICH A PREMIUM IS CHARGED, AND THAT THE AMOUNT REPRESENTING THE PREMIUM IS INCLUDED BY A BIDDER AS A PART OF HIS BID PRICE, AND THAT CONSEQUENTLY WHEN A SUCCESSFUL BIDDER IS PERMITTED TO FURNISH GUARANTY OF A CHARACTER OTHER THAN A SURETY COMPANY BOND, AN AMOUNT REPRESENTING THE PREMIUM ON THE SURETY COMPANY BOND SHOULD BE DEDUCTED FROM THE CONTRACTOR'S ACCOUNT. HOWEVER, A PERFORMANCE BOND DOES NOT NECESSARILY HAVE TO BE A SURETY COMPANY BOND, AND A BIDDER MAY INTEND WHEN FIGURING HIS BID TO FURNISH A BOND WITH INDIVIDUAL SURETIES OR UNITED STATES LIBERTY BONDS OR OTHER BONDS OR NOTES OF THE UNITED STATES WHICH HE HAS A LEGAL RIGHT TO DO, IN VIEW OF WHICH IT IS BELIEVED IT WOULD BE UNFAIR TO APPLY THE PROCEDURE STIPULATED IN THE DECISION SUPRA. THEREFORE, IT OCCURS TO THE VETERANS' ADMINISTRATION THAT IN THOSE INSTANCES WHEN CONTRACTORS WILL BE REQUIRED TO FURNISH SECURITY TO GUARANTEE FAITHFUL PERFORMANCE OF CONTRACTS, THE ADVERTISED SPECIFICATIONS SHOULD CLEARLY INDICATE THE KINDS OF GUARANTY THAT WILL BE ACCEPTABLE AND REQUIRE BIDDERS TO STATE IN THEIR BIDS THE KIND OF GUARANTY THEY WILL FURNISH IN THE EVENT AWARDS ARE MADE TO THEM.

YOUR ADVICE AT AN EARLY DATE CONCERNING THE MATTERS PRESENTED WILL BE APPRECIATED AS THE QUESTIONS PROPOUNDED ARE OF PARAMOUNT IMPORTANCE TO CONTRACTING OFFICERS OF THE VETERANS' ADMINISTRATION.

THE ACT OF AUGUST 13, 1894, 28 STAT. 278, AS AMENDED BY ACT OF FEBRUARY 24, 1905, 33 STAT. 811, PROVIDED IN PART---

THAT HEREAFTER ANY PERSON OR PERSONS ENTERING INTO A FORMAL CONTRACT WITH THE UNITED STATES FOR THE CONSTRUCTION OF ANY PUBLIC BUILDING, OR THE PROSECUTION AND COMPLETION OF ANY PUBLIC WORK, OR FOR REPAIRS UPON ANY PUBLIC BUILDING OR PUBLIC WORK, SHALL BE REQUIRED, BEFORE COMMENCING SUCH WORK, TO EXECUTE THE USUAL PENAL BOND, WITH GOOD AND SUFFICIENT SURETIES,

WITH RESPECT TO CONSTRUCTION CONTRACTS IN CONNECTION WITH WHICH THE TAKING OF PERFORMANCE BONDS TO PROTECT THE GOVERNMENT, MATERIALMEN, AND LABORERS WAS MADE MANDATORY UNDER THE PROVISIONS OF THE ACT OF AUGUST 13, 1894, AS AMENDED, THIS OFFICE HELD THAT SUCH BONDS ARE REQUIRED FOR ALL WORK ESTIMATED TO COST $2,000 OR MORE. HOWEVER, THERE WAS NO REQUIREMENT THAT SUCH BONDS BE EXECUTED BY A CORPORATE SURETY. IN THIS CONNECTION PARAGRAPH 9, STANDARD FORM NO. 22, STANDARD GOVERNMENT INSTRUCTIONS TO BIDDERS, PROVIDES THAT "THE BOND OF ANY SURETY COMPANY AUTHORIZED BY THE SECRETARY OF THE TREASURY TO DO BUSINESS, OR OF TWO RESPONSIBLE INDIVIDUAL SURETIES, WILL BE ACCEPTED AS SECURITY FOR ANY BID OR CONTRACT.' SEE ALSO STANDARD FORM NO. 25, STANDARD GOVERNMENT FORM OF PERFORMANCE BOND, APPROVED BY THE PRESIDENT NOVEMBER 19, 1926, FOR USE WHERE BONDS ARE REQUIRED FOR THE FAITHFUL PERFORMANCE OF GOVERNMENT CONTRACTS IN ALL DEPARTMENTS AND ESTABLISHMENTS OF THE GOVERNMENT, WHICH CONTAINS BLANK SPACES FOR SIGNATURE OF EITHER INDIVIDUAL OR CORPORATE SURETIES. THE ACT OF AUGUST 13, 1894, AS AMENDED BY THE ACT OF FEBRUARY 24, 1905, HAS BEEN SUPERSEDED BY THE ACT OF AUGUST 24, 1935, 49 STAT. 793.

GENERALLY, IN COMPARATIVELY SMALL CONTRACTS PERFORMANCE BONDS NEED NOT BE REQUIRED, BUT WHERE THE NEED FOR SECURITY FOR THE PERFORMANCE OF SUCH CONTRACTS IS ADMINISTRATIVELY DETERMINED, THE ADVERTISED CONDITIONS SHOULD CLEARLY NOTIFY PROSPECTIVE BIDDERS THAT A CASH DEPOSIT, CERTIFIED CHECK, OR PERFORMANCE BOND MAY BE FURNISHED AT THEIR OPTION. SEE A-61391, MAY 2, 1935. HOWEVER, WHERE THE ADVERTISED CONDITIONS HAVE SPECIFIED THE FURNISHING OF A PERFORMANCE BOND, THE GENERAL RULE IS THAT SUCH BOND MUST BE FURNISHED FOR FILING WITH THE CONTRACT, OTHERWISE THE CONTRACT IS NOT COMPLETE WITHOUT IT.

NO GENERAL RULE WAS STATED IN THE DECISION REFERRED TO IN YOUR LETTER, 15 COMP. GEN. 688, WHICH INVOLVED A CASE WHEREIN THE CONTRACTOR HAD FURNISHED NEITHER CORPORATE SURETY NOR ANY SUBSTITUTE THEREFOR AUTHORIZED BY LAW OR REGULATIONS.

THE INQUIRIES CONTAINED IN PARAGRAPHS 2 AND 3 OF YOUR LETTER ARE ANSWERED IN THE NEGATIVE. THE QUESTION RAISED IN PARAGRAPH 4 APPEARS TO BE ANSWERED IN THE FOREGOING DISCUSSION. THE VIEW EXPRESSED IN THE CONCLUDING SENTENCE OF PARAGRAPH 5 IS CORRECT.