Builders and Contractors Exchange
Weekly Bulletin: 18 apr 2008
A Contractor's Contract: The Bond Premium Rule Under Fixed-Price Construction Contracts
By: Brad A. Embree
When contractors submit a progress payment claim to the government, they are generally paid for their work and materials on a monthly basis. The standard rule that regulates this method of payment under fixed-price government construction contracts is Federal Acquisition Regulation 52.232-5. Under this rule, the government makes monthly progress payments as the construction work proceeds.
This rule benefits a contractor because he or she may submit a progress billing before actually paying subcontractors and suppliers. For example, a general contractor who has performed 10% of the work on a project can submit a progress billing even if that contractor has yet to pay the subcontractor who poured the concrete. Once the contractor receives the payment from the government, that contractor can then pay the subcontractor for the work performed. Before submitting a second progress billing, however, the general contractor will have to certify that payments due to any subcontractors and suppliers from previous payments received under the contract have been made.
A contractor should bear in mind that along with each request for a progress payment, he or she must furnish a certification stating that the amounts requested are only for contract work performed in accordance with the specifications, terms, and conditions of the contract. If a contractor makes a certified request for a progress payment, and then realizes that a part of the request is for performance that does not meet these contractual specifications, he or she will have to refund any unearned amounts.
Contractors should note a particular piece of language embedded within this rule. This exception relates to bond premiums on payment and performance bonds. The exception states that the government will reimburse the contractor for the cost of the payment and performance bonds upon furnishing the government evidence that the sureties received full payment. In other words, the bond premiums must be paid before the government is billed. Thus, contractors should be advised that, with respect to bond premiums, submitting a premature bill can violate contractual obligations.
Questions?
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.