Disbursement of Contract Retainages

The Department of the Interior requested an advance decision as to whether contract retainages under a construction contract awarded by the National Park Service should be paid to the contractor's surety or to the Internal Revenue Service (IRS) in satisfaction of a tax levy against the contractor. The contractor completed the work after incurring additional expenses as a result of changes directed during the course of initial construction and rectification of certain construction deficiencies. The surety contended that in response to claims of defective work, it completed work later claimed to be outside the scope of work. It advised the contracting officer of its interest in the retainages. The IRS served three notices of levy on the contracting officer demanding payment from the contract retainages for taxes outstanding against the contractor. It is well established that a surety which has completed performance of a contract after default by a contractor is entitled to withheld funds free of setoff. However, the surety must prove that it expended more than it has already received in reimbursement from the Government. In this case, GAO held that since a $75,000 payment was directed to the surety's office, it had ample opportunity to protect its own interests, and there was nothing on the record to indicate why the claim was not satisfied. Accordingly, the surety did not establish entitlement to the undisbursed contract retainages.