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The Air Force requested a decision on whether it should make contract payments to the contractor, the contractor's surety, or an assignee bank following the contractor's default on and termination of a contract for housing renovation. After termination, the surety on the contractor's performance bond completed the project; however, the surety would not enter into the customary takeover agreement with the Air Force. The agency decided not to pay the surety during the time that the contract work was being performed and, when the work was completed, the contracting officer did not know who should receive the contract funds. GAO held that the surety was entitled to the funds because it was called upon to perform the contract work under its performance bond, giving it priority over the prime contractor and the contractor's assignee bank. Accordingly, the funds should be paid to the defaulting contractor's surety.

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