[Federal Register Volume 62, Number 163 (Friday, August 22, 1997)]
[Rules and Regulations]
[Pages 44805-44808]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-21488]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 1, 28, and 52

[FAC 97-01; FAR Case 95-301; Item III]
RIN 9000-AG99


Federal Acquisition Regulation; Irrevocable Letters of Credit and 
Alternatives to Miller Act Bonds

AGENCIES: Department of Defense (DoD), General Services Administration 
(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Interim rule adopted as final with changes.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council have agreed to adopt as final, with 
changes, the interim rule published as Item XVII of Federal Acquisition 
Circular 90-39 on June 20, 1996. The rule amends the Federal 
Acquisition Regulation (FAR) to address the use of irrevocable letters 
of credit in lieu of surety on Miller Act bonds (OFPP Policy Letter 91-
4) and alternatives to Miller Act Bonds, as required by Section 4101(b) 
of the Federal Acquisition Streamlining Act of 1994 (FASA) (Pub. L. 
103-355). This regulatory action was not subject to Office of 
Management and Budget review under Executive Order 12866, dated 
September 30, 1993, and is not a major rule under 5 U.S.C. 804.

DATE: Effective October 21, 1997.

FOR FURTHER INFORMATION CONTACT: The FAR Secretariat, Room 4035, GS 
Building, Washington, DC 20405 (202) 501-4755 for information 
pertaining to status or publication schedules. For clarification of 
content, contact Mr. Jack O'Neill, Procurement Analyst, at (202) 501-
3856. Please cite FAC 97-01, FAR case 95-301.

SUPPLEMENTARY INFORMATION:

A. Background

    This final rule amends FAR Parts 1, 28, and 52 to provide for use 
of Irrevocable Letters of Credit as substitutes for corporate or 
individual surety on Miller Act bonds, and provides alternatives to 
Miller Act payment bonds for construction contracts valued at $25,000 
to $100,000, which are no longer subject to the Miller Act, in 
accordance with Section 4104(b)(1) of FASA. An interim rule with 
request for comment was published in the Federal Register on June 20, 
1996 (61 FR 31651). Comments were received from seven respondents. The 
final rule includes the following changes in response to public 
comments:
     Update of the references to reflect the current version of 
the Uniform Customs and Practice for Documentary Credits.
     Amendment of the definition of Irrevocable Letter of 
Credit (ILC). Deletion of application of the term ``unconditional'' to 
ILCs.
     Incorporation of requirements for a specific expiration 
date for ILCs used in lieu of surety on performance or payment bonds, 
with automatic extension for one-year periods, until the contracting 
officer notifies the financial institution that the Government is 
waiving the right to payment.
     Limitation of the requirement for confirmation of ILCs 
over $5 million to those issued by financial institutions that had 
letter of credit business of less than $25 million in the past year.
     Incorporation of an explicit requirement for credit rating 
service to be as specified in Office of Federal Procurement Policy 
Pamphlet No. 7.
     Amendment of the clause at 52.228-13, Alternative Payment 
Protections, to specify the amount of payment protection as 50 percent 
of the contract price, and to require payment protection within a 
certain number of days after contract award.
    The Councils did not adopt a comment which recommended a change in 
the expiration date for ILCs from 60 to 75 days after the close of the 
bid acceptance period, as the comment appeared to be based on a 
misinterpretation of the rule. The recommended 75-day expiration period 
was based on the need for 60 days to cover the bid acceptance period, 
plus 10 days to cover the time necessary for submission of payment and 
performance bonds, and 5 additional days to cover mailing time. 
However, as written, the rule provides for 60 days in addition to the 
number of days required for the bid acceptance period; i.e., if the bid 
acceptance period is 60 days, the rule requires the ILC to cover a 
total of 120 days before expiration.

B. Regulatory Flexibility Act

    The final rule is expected to have a significant positive economic 
impact on a substantial number of small entities within the meaning of 
the Regulatory Flexibility Act, 5 U.S.C. 601 et seq., because the rule 
provides alternatives to Miller Act bonds for construction contracts 
between $25,000 and $100,000, which may be beneficial to

[[Page 44806]]

construction contractors. A Final Regulatory Flexibility Analysis 
(FRFA) has, therefore, been prepared and will be provided to the Chief 
Counsel for Advocacy of the Small Business Administration. A copy of 
the FRFA may be obtained from the FAR Secretariat. The analysis is 
summarized as follows:

    This rule will apply to all businesses, large and small, which 
contract with the Government for construction. The objective is to 
make it easier for small construction contractors to provide payment 
protection, by providing alternatives for construction contracts 
valued between $25,000 and $100,000. In addition, the rule permits 
the use of Irrevocable Letters of Credit as security for Miller Act 
bonds, in lieu of corporate or individual sureties. The rule imposes 
no new recordkeeping or reporting requirements, and provides 
alternatives to Miller Act payment bonds for construction contracts 
which do not exceed $100,000.

C. Paperwork Reduction Act

    This rule will reduce the information collection requirements which 
the Office of Management and Budget (OMB) previously approved under 44 
U.S.C. 3501, et seq. (OMB Control No. 9000-0045). The rule will reduce 
the number of respondents and responses by identifying and correcting 
an overlap in reporting of performance and payment and bid bonds.

List of Subjects in 48 CFR Parts 1, 28, and 52

    Government procurement.

    Dated: August 7, 1997.
Edward C. Loeb,
Director, Federal Acquisition Policy Division.

    Accordingly, the interim rule amending 48 CFR Parts 28 and 52 which 
was published at 61 FR 31651, June 20, 1996, is adopted as final with 
changes as set forth below:
    1. The authority citation for 48 CFR Parts 1, 28, and 52 continues 
to read as follows:

    Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42 
U.S.C. 2473(c).

PART 1--FEDERAL ACQUISITION REGULATIONS SYSTEM

    2. The table in section 1.106 is amended by removing the entries 
for 28.106-1(b) and 52.228-3; revising the entry for 52.228-2; and 
adding entries in numerical order to read as follows:


1.106  OMB Approval under the Paperwork Reduction Act.

------------------------------------------------------------------------
            FAR segment                        OMB control No.          
------------------------------------------------------------------------
                                                                        
                  *        *        *        *        *                 
28.106-1(e).......................  9000-0001                           
28.106-1(n).......................  9000-0119                           
                                                                        
                  *        *        *        *        *                 
52.228-2..........................  9000-0045 and 9000-0119             
52.228-13.........................  9000-0045                           
52.228-15.........................  9000-0045                           
52.228-16.........................  9000-0045 and 9000-0119             
                                                                        
                  *        *        *        *        *                 
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PART 28--BONDS AND INSURANCE

    3. Section 28.000 is revised to read as follows:


28.000  Scope of part.

    This part prescribes requirements for obtaining financial 
protection against losses under sealed bid and negotiated contracts. It 
covers bid guarantees, bonds, alternative payment protections, security 
for bonds, and insurance. The terms ``bid'' and ``bidders'' include 
``proposal'' and ``offerors.''
    4. Section 28.001 is amended by revising the definitions for 
``Irrevocable letter of credit'' and ``Penal sum'' to read as follows:


28.001  Definitions.

* * * * *
    Irrevocable letter of credit (ILC) means a written commitment by a 
federally insured financial institution to pay all or part of a stated 
amount of money until the expiration date of the letter, upon 
presentation by the Government (the beneficiary) of a written demand 
therefor. Neither the financial institution nor the offeror/contractor 
can revoke or condition the letter of credit.
    Penal sum or penal amount means the amount of money specified in a 
bond (or a percentage of the bid price in a bid bond) as the maximum 
payment for which the surety is obligated or the amount of security 
required to be pledged to the Government in lieu of a corporate or 
individual surety for the bond.
* * * * *

Subpart 28.1--Bonds and Other Financial Protections

    5. The heading of Subpart 28.1 is revised to read as set forth 
above.
    6. Section 28.100 is revised to read as follows:


28.100  Scope of subpart.

    This subpart prescribes requirements and procedures for the use of 
bonds, alternative payment protections, and all types of bid 
guarantees.
    7. Section 28.102-2 is amended by revising the introductory text of 
paragraph (b)(1) and paragraphs (b)(2), (c)(1), and (c)(2) to read as 
follows:


28.102-2  Amount required.

* * * * *
    (b) * * * (1) The penal amount of payment bonds or the amount of 
alternative payment protection shall equal--
* * * * *
    (2) If the original contract price is $5 million or less, the 
Government may require additional protection if the contract price is 
increased.
    (i) The penal amount of the total protection as revised shall meet 
the requirement of paragraph (b)(1) of this subsection.
    (ii) The Government shall secure the required additional protection 
by directing the contractor to increase the penal sum of the existing 
bond or to obtain an additional bond, or to furnish additional 
alternative payment protection.
* * * * *
    (c) * * * (1) When determining the penal sum of bonds or the amount 
of alternative payment protection for requirements contracts, the 
contracting officer shall consider the contract price to be the price 
payable for the estimated quantity.
    (2) When determining the penal sum of bonds or the amount of 
alternative payment protection for indefinite-quantity contracts, the 
contracting officer shall consider the contract price to be the price 
payable for the specified minimum quantity. When the minimum quantity 
is exceeded, paragraphs (a)(2) and (b)(2) of this subsection apply.
* * * * *
    8. Section 28.102-3 is amended by revising the section heading and 
the last sentence of paragraph (b) to read as follows:


28.102-3   Contract clauses.

* * * * *
    (b) * * * Complete the clause by specifying the payment protections 
selected (see 28.102-1(b)(1)) and the deadline for submission.
    9. Section 28.106-3 is revised to read as follows:


28.106-3   Additional bond and security.

    (a) When additional bond coverage is required and is secured in 
whole or in part by the original surety or sureties, agencies shall use 
Standard Form 1415,

[[Page 44807]]

Consent of Surety and Increase of Penalty. Standard Form 1415 is 
authorized for local reproduction, and a copy of the form is furnished 
for this purpose in part 53 of the looseleaf edition of the FAR.
    (b) When additional bond coverage is required and is secured in 
whole or in part by a new surety or by one of the alternatives 
described in 28.204 in lieu of corporate or individual surety, agencies 
shall use Standard Form 25, Performance Bond; Standard Form 1418, 
Performance Bond for Other Than Construction Contracts; Standard Form 
25-A, Payment Bond; or Standard Form 1416, Payment Bond for Other Than 
Construction Contracts.
    10. Section 28.106-8 is revised to read as follows:


28.106-8   Payment to subcontractors or suppliers.

    The contracting officer will only authorize payment to 
subcontractors or suppliers from an ILC (or any other cash equivalent 
security) upon a judicial determination of the rights of the parties, a 
signed notarized statement by the contractor that the payment is due 
and owed, or a signed agreement between the parties as to amount due 
and owed.

Subpart 28.2--Sureties and Other Security for Bonds

    11. The heading of Subpart 28.2 is revised as set forth above.
    12. Section 28.200 is revised to read as follows:


28.200   Scope of subpart.

    This subpart prescribes procedures for the use of sureties and 
other security to protect the Government from financial losses.


28.201   Requirements for security.

    13. Section 28.201 is amended by revising the section heading as 
set forth above, and in paragraph (b) by inserting the word ``other'' 
after ``or'' the first time it appears.
    14. Section 28.204 is amended in paragraph (a) by revising the 
second sentence to read as follows:


28.204   Alternatives in lieu of corporate or individual sureties.

    (a) * * * When any of those types of security are deposited, a 
statement shall be incorporated in the bond form pledging the security 
in lieu of execution of the bond form by corporate or individual 
sureties. * * *
* * * * *
    15. Section 28.204-3 is amended by revising paragraphs (b), (c), 
(f) introductory text, (f)(2) introductory text, (f)(2)(ii)(B), (g) 
introductory text, (g)(1) and (h) to read as follows:


28.204-3   Irrevocable letter of credit (ILC).

* * * * *
    (b) The ILC shall be irrevocable, require presentation of no 
document other than a written demand and the ILC (and letter of 
confirmation, if any), expire only as provided in paragraph (f) of this 
subsection, and be issued/confirmed by an acceptable federally insured 
financial institution as provided in paragraph (g) of this subsection.
    (c) To draw on the ILC, the contracting officer shall use the sight 
draft set forth in the clause at 52.228-14, and present it with the ILC 
(including letter of confirmation, if any) to the issuing financial 
institution or the confirming financial institution (if any).
* * * * *
    (f) The period for which financial security is required shall be as 
follows:
* * * * *
    (2) If used as an alternative to corporate or individual sureties 
as security for a performance or payment bond, the offeror/contractor 
may submit an ILC with an initial expiration date estimated to cover 
the entire period for which financial security is required or an ILC 
with an initial expiration date that is a minimum period of one year 
from the date of issuance. The ILC shall provide that, unless the 
issuer provides the beneficiary written notice of non-renewal at least 
60 days in advance of the current expiration date, the ILC is 
automatically extended without amendment for one year from the 
expiration date, or any future expiration date, until the period of 
required coverage is completed and the contracting officer provides the 
financial institution with a written statement waiving the right to 
payment. The period of required coverage shall be:
* * * * *
    (ii) * * *
    (B) For performance bonds only, until completion of any warranty 
period.
    (g) Only federally insured financial institutions rated investment 
grade or higher shall issue or confirm the ILC. Unless the financial 
institution issuing the ILC had letter of credit business of at least 
$25 million in the past year, ILCs over $5 million must be confirmed by 
another acceptable financial institution that had letter of credit 
business of at least $25 million in the past year.
    (1) The offeror/contractor shall provide the contracting officer a 
credit rating from a recognized commercial rating service as specified 
in Office of Federal Procurement Policy Pamphlet No. 7 (see 28.204-
3(h)) that indicates the financial institution has the required 
rating(s) as of the date of issuance of the ILC.
* * * * *
    (h)(1) Additional information on credit rating services and 
investment grade ratings is contained within Office of Federal 
Procurement Policy Pamphlet No. 7, Use of Irrevocable Letters of 
Credit. This pamphlet may be obtained by calling the Office of 
Management and Budget's publications office at (202) 395-7332.
    (2) A copy of the Uniform Customs and Practice (UCP) for 
Documentary Credits, 1993 Revision, International Chamber of Commerce 
Publication No. 500, is available from: ICC Publishing, Inc., 156 Fifth 
Avenue, New York NY, 10010, Telephone: (212) 206-1150, Telefax: (212) 
633-6025, E-mail: [email protected]

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

    16. Section 52.228-2 is amended by revising the introductory text, 
the clause date, and paragraph (d) to read as follows:


52.228-2   Additional Bond Security.

    As prescribed in 28.106-4(a), insert the following clause:

Additional Bond Security (Oct 1997)

* * * * *
    (d) An irrevocable letter of credit (ILC) used as security will 
expire before the end of the period of required security. If the 
Contractor does not furnish an acceptable extension or replacement 
ILC, or other acceptable substitute, at least 30 days before an 
ILC's scheduled expiration, the Contracting officer has the right to 
immediately draw on the ILC.

(End of clause)

    17. Section 52.228-13 is amended by revising the clause date and 
paragraphs (b), (c) and (f) to read as follows:


52.228-13   Alternative Payment Protections.

* * * * *

Alternative Payment Protections (Oct 1997)

* * * * *
    (b) The amount of the payment protection shall be 50 percent of 
the contract price.
    (c) The submission of the payment protection is required within 
________ days of contract award.
* * * * *
    (f) When a tripartite escrow agreement is used, the Contractor 
shall utilize only suppliers of labor and material that signed the 
escrow agreement.

(End of clause)

    18. Section 52.228-14 is amended by revising:

[[Page 44808]]

    (a) The clause date and paragraphs (a), (b), (c) introductory text, 
(c)(2) introductory text, (c)(2)(ii)(B), and (d);
    (b) Following paragraph (e) in the ``Irrevocable Letter of 
Credit'', paragraphs 1, 2, 4, and 6; and
    (c) Following paragraph (f) in the ILC confirmation, paragraphs 3, 
4(a), and 6. The revised sections read as follows:


52.228-14   Irrevocable Letter of Credit.

* * * * *

Irrevocable Letter of Credit (Oct 1997)

    (a) ``Irrevocable letter of credit'' (ILC), as used in this 
clause, means a written commitment by a federally insured financial 
institution to pay all or part of a stated amount of money, until 
the expiration date of the letter, upon presentation by the 
Government (the beneficiary) of a written demand therefor. Neither 
the financial institution nor the offeror/Contractor can revoke or 
condition the letter of credit.
    (b) If the offeror intends to use an ILC in lieu of a bid bond, 
or to secure other types of bonds such as performance and payment 
bonds, the letter of credit and letter of confirmation formats in 
paragraphs (e) and (f) of this clause shall be used.
    (c) The letter of credit shall be irrevocable, shall require 
presentation of no document other than a written demand and the ILC 
(including confirming letter, if any), shall be issued/confirmed by 
an acceptable federally insured financial institution as provided in 
paragraph (d) of this clause, and--
* * * * *
    (2) If used as an alternative to corporate or individual 
sureties as security for a performance or payment bond, the offeror/
Contractor may submit an ILC with an initial expiration date 
estimated to cover the entire period for which financial security is 
required or may submit an ILC with an initial expiration date that 
is a minimum period of one year from the date of issuance. The ILC 
shall provide that, unless the issuer provides the beneficiary 
written notice of non-renewal at least 60 days in advance of the 
current expiration date, the ILC is automatically extended without 
amendment for one year from the expiration date, or any future 
expiration date, until the period of required coverage is completed 
and the Contracting Officer provides the financial institution with 
a written statement waiving the right to payment. The period of 
required coverage shall be:
* * * * *
    (ii) * * *
    (B) For performance bonds only, until completion of any warranty 
period.
    (d) Only federally insured financial institutions rated 
investment grade or higher shall issue or confirm the ILC. The 
offeror/Contractor shall provide the Contracting Officer a credit 
rating that indicates the financial institution has the required 
rating(s) as of the date of issuance of the ILC. Unless the 
financial institution issuing the ILC had letter of credit business 
of at least $25 million in the past year, ILCs over $5 million must 
be confirmed by another acceptable financial institution that had 
letter of credit business of at least $25 million in the past year.
    (e) * * *
    1. We hereby establish this irrevocable and transferable Letter 
of Credit in your favor for one or more drawings up to United States 
$________. This Letter of Credit is payable at [issuing financial 
institution's and, if any, confirming financial institution's] 
office at [issuing financial institution's address and, if any, 
confirming financial institution's address] and expires with our 
close of business on ________, or any automatically extended 
expiration date.
    2. We hereby undertake to honor your or the transferee's sight 
draft(s) drawn on the issuing or, if any, the confirming financial 
institution, for all or any part of this credit if presented with 
this Letter of Credit and confirmation, if any, at the office 
specified in paragraph 1 of this Letter of Credit on or before the 
expiration date or any automatically extended expiration date.
* * * * *
    4. This Letter of Credit is transferable. Transfers and 
assignments of proceeds are to be effected without charge to either 
the beneficiary or the transferee/assignee of proceeds. Such 
transfer or assignment shall be only at the written direction of the 
Government (the beneficiary) in a form satisfactory to the issuing 
financial institution and the confirming financial institution, if 
any.
* * * * *
    6. If this credit expires during an interruption of business of 
this financial institution as described in Article 17 of the UCP, 
the financial institution specifically agrees to effect payment if 
this credit is drawn against within 30 days after the resumption of 
our business.
    (f) * * *
    3. We hereby undertake to honor sight draft(s) drawn under and 
presented with the Letter of Credit and this Confirmation at our 
offices as specified herein.
    4. * * *
    (a) At least 60 days prior to any such expiration date, we shall 
notify the Contracting Officer, or the transferee and the issuing 
financial institution, by registered mail or other receipted means 
of delivery, that we elect not to consider this confirmation 
extended for any such additional period; or
* * * * *
    6. If this confirmation expires during an interruption of 
business of this financial institution as described in Article 17 of 
the UCP, we specifically agree to effect payment if this credit is 
drawn against within 30 days after the resumption of our business.
* * * * *

(End of clause)

[FR Doc. 97-21488 Filed 8-21-97; 8:45 am]
BILLING CODE 6820-EP-P