[Question Concerning Payment of Contract Surety]

A Bureau of Indian Affairs (BIA) contracting officer asked whether it was proper to pay the contract surety or the trustee in bankruptcy the monies withheld on a BIA contract. GAO found that: (1) the surety paid subcontractors and suppliers its payment bond obligations after the contractor completed the work; (2) a payment bond surety which pays the debts of its principal has the right to reimbursement; (3) the surety had priority over the trustee in bankruptcy to contract retainage funds; and (4) since the contractor did not make the necessary payments, the funds could not become part of its bankrupt estate. Accordingly, the contract surety should be paid the amount retained.