Federal Acquisition Regulation: Individual Sureties

 
CONTENT
Federal Register, Volume 85 Issue 29 (Wednesday, February 12, 2020)
[Federal Register Volume 85, Number 29 (Wednesday, February 12, 2020)]
[Proposed Rules]
[Pages 7910-7916]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02655]
[[Page 7910]]
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 19, 28, 32, 52, and 53
[FAR Case 2017-003; [Docket No. FAR-2017-0003, Sequence No. 1]
RIN 9000-AN39
Federal Acquisition Regulation: Individual Sureties
AGENCY: Department of Defense (DoD), General Services Administration
(GSA), and National Aeronautics and Space Administration (NASA).
ACTION: Proposed rule.
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SUMMARY: DoD, GSA and NASA are proposing to amend the Federal
Acquisition Regulation (FAR) to implement a section of the National
Defense Authorization Act for Fiscal Year 2016 to change the kinds of
assets that individual sureties must pledge as security for their
individual surety bonds.
DATES: Interested parties should submit comments to the Regulatory
Secretariat Division at one of the addresses shown below on or before
April 13, 2020 to be considered in the formulation of a final rule.
ADDRESSES: Submit comments in response to FAR Case 2017-003 by any of
the following methods:
     Regulations.gov: http://www.regulations.gov. Submit
comments via the Federal eRulemaking portal by entering ``FAR Case
2017-003'' under the heading ``Enter Keyword or ID'' and selecting
``Search.'' Select the link ``Comment Now'' that corresponds with ``FAR
Case 2017-003.'' Follow the instructions provided on the screen. Please
include your name, company name (if any), and ``FAR Case 2017-003'' on
your attached document.
     Mail: General Services Administration, Regulatory-
Secretariat Division (MVCB), ATTN: Lois Mandell, 1800 F Street NW, 2nd
floor, Washington, DC 20405.
    Instructions: Please submit comments only and cite ``FAR case 2017-
003'' in all correspondence related to this case. All comments received
will be posted without change to http://www.regulations.gov, including
any personal and/or business confidential information provided. To
confirm receipt of your comment(s), please check www.regulations.gov,
approximately two to three days after submission to verify posting
(except allow 30 days for posting of comments submitted by mail).
FOR FURTHER INFORMATION CONTACT: Ms. Zenaida Delgado, Procurement
Analyst, at 202-969-7207 or [email protected] for clarification
of content. For information pertaining to status or publication
schedules, contact the Regulatory Secretariat Division at 202-501-4755.
Please cite ``FAR Case 2017-003''.
SUPPLEMENTARY INFORMATION:
I. Background
    DoD, GSA, and NASA are proposing to amend the Federal Acquisition
Regulation (FAR) to require that a pledge of assets given by an
individual surety consist only of eligible obligations. This FAR change
will implement section 874 of the National Defense Authorization Act
(NDAA) for Fiscal Year (FY) 2016 (Pub. L. 114-92), codified at 31
U.S.C. 9310, Individual Sureties.
    The revisions modify existing coverage regarding the use of
individual sureties in support of a Government bonding requirement. FAR
subpart 28.2 requires agencies to obtain adequate security for bonds
when bonds are used with a contract. A corporate or individual surety
is an acceptable form of security for a bond. Corporate sureties are
vetted by the Department of the Treasury to ensure they are
sufficiently capitalized and are listed on Department of the Treasury's
Listing of Approved Sureties (Treasury Department Circular 570).
Individual sureties are not listed on Treasury Department Circular 570;
currently contracting officers determine if an individual surety is
acceptable.
    This FAR rule revises the types of acceptable assets an individual
surety may pledge and requires the Department of the Treasury, Bureau
of the Fiscal Service to review those assets to ensure they meet
established eligibility requirements.
    Under 31 U.S.C. 9310, when Federal law permits acceptance of a
surety bond from a surety not subject to 31 U.S.C. 9305 and 9306 (i.e.,
an individual surety that is not a corporate surety), the individual
surety must pledge assets that are eligible obligations. Eligible
obligations are public debt obligations of the United States
Government. The requirements of 31 U.S.C. 9310 are intended to
strengthen the assets pledged by individual sureties, thereby
mitigating risk to the Government.
II. Discussion and Analysis
    This rule proposes to amend FAR part 28, and its associated clause
at 52.228-11, and adds a new provision at 52.228-XX. The changes
contained in the proposed rule are as follows:
    1. A new section title is added at FAR 28.203, Individual sureties.
    2. Existing section 28.203 is redesignated as 28.203-1, and revised
as described below.
    3. FAR 28.203-1(a). The language requiring contracting officers to
determine the acceptability of individuals proposed as sureties is
revised, and moved to FAR 28.203-1(c). The process oriented language at
FAR 28.203-1(c), while not specifically required by section 874 of the
NDAA for FY 2016, is necessary for its implementation under the FAR,
and aligns well with the Department of the Treasury guidance and
instructions. In addition, language is added to require that assets
pledged by an individual surety meet eligibility requirements
established by the Department of the Treasury, Bureau of the Fiscal
Service. The revised text refers to the Department of the Treasury list
of acceptable assets, available at https://www.treasurydirect.gov/instit/statreg/collateral/2018Final225 ListofAcceptable Collateral.pdf.
    4. FAR 28.203-1(b). The paragraph is revised, and broken out into
four subparagraphs.
     28.203-1(b)(1). The three types of bonds are specifically
cited within the text: Bid bond (Standard Form 24), performance bond
(Standard Form 25), and payment bond (Standard Form 25A). Though this
addition is not related to section 874 of the NDAA for FY 2016
requirements, stating the three types of bonds enables the reader to
quickly see the three bond types without having to look elsewhere.
     28.203-1(b)(2). The existing text referring to the
unencumbered value of the asset exclusive of all outstanding pledges
for other bond obligations, is changed as follows: ``The net adjusted
value of unencumbered assets is their market value minus the margin.''
This change clarifies the intent and context of the valuation
requirement. The phrase ``market value minus the margin'' is added to
clarify that pledged assets are subject to a percentage reduction
(``margin'') from the market value to account for a risk premium. The
new text refers to the Department of the Treasury margin tables, which
can be viewed by accessing an added hyperlink at
www.treasurydirect.gov. In addition, the text in this section is
clarified to state that the net adjusted value of the pledged assets,
when combined, must equal or exceed the penal amount (i.e., face value)
of each bond. Though not specifically required
[[Page 7911]]
by section 874 of the NDAA, this change aligns with the Department of
the Treasury guidance and instructions.
     28.203-1(b)(3). The name of the Standard Form 28,
Affidavit of Individual Surety, is added. This is an administrative
change made to meet FAR drafting conventions.
     28.203-1(b)(4). The phrase ``or contractor'' is added to
clarify when bonds are submitted postaward. The phrase ``net adjusted
value'' of the assets is added to clarify what is to equal or exceed
the penal amount of the bond.
    5. New FAR 28.203-1(c) is added to clarify that the pledge of
assets by an individual surety shall be submitted to the contracting
officer, who will then notify the Department of the Treasury of the
existence of the individual surety, the assets to be pledged, and the
amount necessary to cover the individual surety bond, i.e., the
required amount to be collateralized. If after 3 business days the
contracting officer has not received a response from Treasury, the
contracting officer may seek assistance from the Director, Bank Policy
and Oversight, at 202-504-3502. This section also requires contracting
officers to determine whether the individual surety bond is acceptable
as to the amount necessary to cover the individual surety bond, based
on the asset eligibility and valuation assessment from the Department
of the Treasury. The contracting officer will then notify both the
offeror or contractor and the individual surety of this determination.
These process steps are integral to effective implementation of section
874 requirements in the FAR.
    6. New FAR 28.203-1(d) is added to require the contracting officer
to request the Department of the Treasury operations support team set
up the individual surety asset collateral account for each contract.
The requirements for contracting officers to contact the Department of
the Treasury about individual sureties are additional responsibilities
for contracting officers; however, the Department of the Treasury
officials will be providing collateral eligibility and valuation
assessment.
    7. Current FAR 28.203 paragraphs (e) and (f) are deleted;
paragraphs (c) and (d) are redesignated (e) and (f) under the now
redesignated FAR section 28.203-1. The now redesignated paragraph
28.203-1(e) changes the text from ``competency review'' to
``Certificate of Competency.'' The now redesignated paragraph 28.203-
1(f) allows the contracting officer to permit the contractor to
substitute an acceptable surety when Treasury could not assess the
asset eligibility and valuation within a reasonable time.
    8. Current sections 28.203-1, 28.203-2 and 28.203-3 are deleted;
sections 28.203-4 through 28.203-7 are redesignated 28.203-2 through
28.203-5.
    9. FAR 28.203-2, Acceptability of Assets, is deleted as the
acceptability of assets is governed under the Department of the
Treasury regulations and instructions.
    10. FAR 28.203-3, Acceptance of Real Property, is deleted as real
property is no longer an acceptable form of collateral. As stated
previously, this FAR change will implement section 874 of the NDAA for
FY 2016 (Pub L. 114-82), which adds 31 U.S.C. 9310, Individual
Sureties. 31 U.S.C. 9310 limits the security required for an individual
surety bond to eligible obligations, which are described under 31
U.S.C. 9303. Eligible obligations consist of acceptable collateral or
eligible collateral. Real Property is not an eligible obligation under
31 U.S.C 9301.
    11. The now redesignated FAR section 28.203-2 adds the phrase
``including a revised SF 28'' to clarify that the form must be used
when substituting assets. It also adds the phrase ``Following the
requirements set forth in 28.203-1'' to make it clear that any
substitution of assets is subject to the same requirements as on the
assets originally pledged.
    12. The now redesignated FAR section 28.203-3 deletes the reference
to the Optional Form 90, Release of Lien on Real Property, as real
property is not considered an eligible obligation under 31 U.S.C. 9301.
At paragraph (a)(1), cross-references are added for the convenience of
the reader.
    13. The now redesignated FAR section 28.203-4 added at paragraph
(a) the prescription for the new provision at 52.228-XX, and modified
at paragraph (b) the prescription for the existing clause at 52.228-11
to add the title of the clause.
    14. At FAR 28.204(b), the word ``lien'' is deleted and replaced
with ``security'' to clarify the meaning of the transaction.
    15. A new FAR provision at 52.228-XX is created to distinguish
instructions to offerors from instructions to a contractor, by
relocating the ``offeror'' language from the existing FAR clause at
52.228-11. The provision addresses the offeror requirements for using
an individual surety for a bid guarantee consistent with the text in
the now designated FAR 28.203-1.
    16. FAR clause 52.228-11 is modified to address contractor
requirements for using an individual surety for a performance or
payment bond consistent with the text in the now designated 28.203-1.
    17. Optional Form 90, Release of Lien on Real Property, is removed
as real property is not considered an eligible obligation under 31
U.S.C. 9301. These changes are noted at FAR 28.106-1, the now
designated 28.203-3, 53.228, and 53.300(a).
    18. Conforming and minor editorial changes were made elsewhere.
Cross-references are revised at FAR 19.602-1, 28.102-2(e), 28.204(b),
and 32.202-4(c).
III. Applicability to Contracts at or Below the Simplified Acquisition
Threshold (SAT) and for Commercial Items, Including Commercially
Available Off-the-Shelf (COTS) Items
    DoD, GSA, and NASA do not intend to change the current policy on
the use of bonds for the acquisition of commercial items, including
COTS, found at FAR 28.103. FAR 28.103-1(a) states that ``Generally,
agencies shall not require performance and payment bonds for other than
construction contracts. However, performance and payment bonds may be
used as permitted in 28.103-2 and 28.103-3.''
    DoD, GSA, and NASA do intend to apply the requirements of this rule
to solicitations for contracts valued at or below the SAT. FAR 28.102-
1(b) gives an example of when a bond could be required for an
acquisition under the SAT. As noted in FAR 28.102-1(b), 40 U.S.C. 3132
requires the contracting officer select two or more payment protections
for construction contracts greater than $35,000, but not greater than
$150,000, one of the possible protections being a payment bond.
Individual sureties may provide security for a payment bond in this
situation. DoD, GSA, and NASA intend to determine that it is not in the
best interest of the Government to waive the applicability of section
874 below the SAT, because the new requirement will create greater
certainty of payment for subcontractors. Applying the rule below the
SAT will continue the FAR uniformity in the type of assets allowed to
be pledged, whether the acquisition is above or below the SAT.
IV. Expected Impact on the Public
    DoD, GSA, and NASA have preliminarily concluded that the proposed
rule is regulatory because, as required by law, new requirements are
imposed on individual sureties seeking to provide bonds to Federal
Government contractors. However, DoD, GSA, and NASA also believe there
may be some burden reduction associated with this rule. Because the
Government has been
[[Page 7912]]
unable to identify other than anecdotal data on the use of individual
sureties, public input is sought before a final determination is made
on whether the rule is regulatory and whether there is burden
reduction.
    An individual surety must pledge public debt obligations of the
United States Government. The individual surety no longer will be
allowed to pledge real estate or assets such as stocks and bonds, as is
currently permitted by the FAR. At least one surety company
specializing in Federal small business contracting cautioned about the
impact of reducing the availability of individual sureties, stating
that the ``individual surety is a tool to groom contractors back into
corporate surety credit . . . it is the only method to keep small
businesses that have credit issues . . . in business.'' Testimony of
the Barbour Group before the House Judiciary Subcommittee on Courts,
Commercial, and Administrative Law, March 5, 2012.
    Information on the use of individual and corporate sureties by
Federal contractors and subcontractors is currently not centrally
collected, so the percentage of these entities availing themselves of
individual sureties that would no longer be accepted under this new
rule is unclear. However, there is reason to believe the impact is
small, relative to the total amount of construction contract spending
for which individual sureties could be used historically. Specifically,
DoD, GSA, and NASA attempted to determine all of the awards that
contained the FAR clause at 52.228-11, Pledges of Assets, with a total
obligated amount of over $35,000. This clause, which would be amended
by this rulemaking, has historically allowed pledges of assets from
individual sureties. Only information from DoD was available to
determine which contracts contained this particular FAR clause. This
was thought to be a representative, if conservative, sample, as DoD
contracts account for 63 percent of all Federal agencies' obligated
dollars in FY 2017, and DoD has a higher proportion of construction
contracts that would likely contain this requirement.
    Based on FY 2017 data contained in the Electronic Document Access
(EDA) system (the DoD official contract file system), 8,603 DoD
contracts contained the relevant FAR clause and a total obligated
amount of over $35,000, with a total award magnitude of $12.8 billion
(total dollars obligated on the 8,603 contracts). These awards account
for 14 percent of the total number of FY 2017 DoD construction contract
awards (8,603 / 60,317 (according to data in the Federal Procurement
Data System (FPDS))) and 66 percent of the total construction dollars
obligated for FY 2017 by DoD ($12.8B/$19.3B (according to data in
FPDS)). These contracts were awarded to 318 unique other than small
businesses (1,195 awards), and 1,672 unique small businesses (7,408
awards). However, the impact is even smaller considering that these
contractors could be using corporate sureties, individual sureties, or
pledging their own assets as acceptable forms of security. DoD, GSA,
and NASA interviewed operational contracting officers at the largest
procurement offices engaged in construction contracting--the Naval
Facilities Engineering Command, and GSA's Public Building Service.
Based on their responses, DoD, GSA, and NASA estimate that less than
0.1 percent of contractors, mostly small businesses, are using
individual sureties to meet the required bonding under contracts.
Accordingly, DoD, GSA, and NASA estimate about 9 (8,603 * 0.1 percent)
FY 2017 DoD contract awards accounting for 0.015 percent (9 / 60,317)
of the total number of FY 2017 DoD construction contract awards and
0.066 percent ($12.8M / $19.3B) of the total construction dollars
obligated for FY17 by DoD, might be associated with individual
sureties. Using data in FPDS and applying the same percentages to the
59,351 of FY 2017 other than DoD construction contract awards, and the
$12 billion construction dollars obligated for FY17 by other than DoD,
DoD, GSA, and NASA find that 9 (59,351 * 0.00015) construction contract
awards and $7.9 million construction dollars ($12 B * 0.00066)
obligated for FY 2017 by other than DoD might be associated with
individual sureties. In summary, DOD, GSA, and NASA found that this
proposed rule is likely to impact about 18 contract awards, and $20.7
million obligated dollars.
    To the extent that this proposed rule reduces the pool of
individual sureties from which a small business contractor or
subcontractor may obtain a bond, these entities have the option of
seeking bond assistance through the Surety Bond Guarantee (SBG) Program
operated by the U.S. Small Business Administration (SBA). Under the SBG
Program, SBA guarantees the bid, performance or payment bonds issued by
participating surety companies to small business contractors. The SBA
guarantee covers a certain percentage of any loss that the surety may
incur on the bond. The SBG Program is intended to assist small business
contractors who are unable to obtain a bond on reasonable terms and
conditions without the SBA guarantee. The SBA's guarantee, therefore,
encourages the surety company to issue a bond that it would not
otherwise provide for a small business. SBA may guarantee bonds for
contracts that do not exceed $6.5 million, and up to $10 million if a
Federal contracting officer certifies that such a guarantee is
necessary (see 13 CFR part 115). Public input is being sought to help
evaluate whether the reduction in business opportunities for providers
of individual sureties is likely to be offset by an increase in
opportunities for providers of corporate sureties.
    In addition, there are aspects of the rule that could reduce
burden. For example, the new requirements will create greater certainty
of payment for subcontractors, who are a key intended benefactor of the
law and proposed rule. While DoD, GSA, and NASA lack data to quantify
this benefit, this certainty should eliminate due diligence steps that
Federal subcontractors have ostensibly been forced to take to ensure
they will indeed be protected by a surety bond in the event of a prime
contractor's default. As described in one law review article, this due
diligence includes verifying with the designated financial institution
that it is holding cash or cash equivalents in an escrow account in the
name of the contracting agency for use in meeting the surety's
promises. See Edward G. Gallagher & Mark H. McCallum, The Importance of
Surety Bond Verification, 39 Public Contract Law Journal 269 at 283
(Winter 2010).
    It is also anticipated that the Federal Government may experience
reduced burden under the new rule. Contracting officers will no longer
have to research individual sureties and make case-by-case
determinations of whether securities pledged by individual sureties are
suitable and can instead refocus their attention on higher value
acquisition planning and management activities that take better
advantage of their training as acquisition specialists.
    Rates of default on individual and corporate sureties are currently
unknown, but all other aspects of a construction contractor being
equal, it is assumed that corporate sureties provide greater cost
avoidance in the case of default by prime contractors to both
subcontractors and the Government. These costs could include financial
losses on Federal projects, loss of experienced subcontractors and
workers when they are not paid, delays in a project's completion,
litigation costs, and additional expenses related to contract
administrative actions to secure resources needed to continue the
[[Page 7913]]
construction project and make up for schedule delays. More information
is needed to quantify these costs and the potential mitigating impacts
of this rule.
    DoD, GSA, and NASA welcome public input to help more fully
understand the impact of this regulation on affected parties. DoD, GSA,
and NASA lack data on individual sureties, but believe based on
interviews of contracting officials of major construction operations at
the Naval Facilities Engineering Command, and GSA's Public Building
Service, DoD, and GSA that individual sureties are used far less
frequently than corporate sureties. In addition to input from any
subject matter experts, DoD, GSA, and NASA invite input from affected
parties, including the following:
    1. For subcontractors and suppliers on Federal construction and
other projects that require prime contractors to obtain sureties--
    a. What positive or negative impacts do you anticipate the new
rules will have on your work?
    b. To what extent might SBA's SBG Program provide an alternative
option to individual sureties?
    c. Do you agree that subcontractors may see reduced burden because
they will not need to take the same level of precaution to protect
against fraud and abuse by individual sureties, when individual
sureties are used? If not, why not?
    2. For individual sureties--
    a. What additional burden may be created for individual sureties
who decide to convert their assets into the kind that qualify under the
new legislation?
    b. What would be the impact, in terms of time, effort, and cost,
for individual sureties to convert their assets into the kind that
qualify under the new legislation?
    3. For prime contractors that currently rely on individual
sureties--
    a. Do you anticipate greater difficulty obtaining necessary surety
bonds? If so, why?
    b. Have you experienced challenges with individual sureties? If so,
what was the nature of the challenges?
    c. Do you expect fees charged by individual sureties to be impacted
under the new rule?
    d. To what extent might SBA's SBG Program provide an alternative
option to individual sureties?
    DoD, GSA, and NASA have calculated the cost of regulatory
familiarization with the new process, based on FPDS data for FY 2017,
estimating that for the first year 5 entities will be subject to the
new requirements, 1 hour per entity; and due to turnover and new
entrants, 20 percent of that amount in subsequent years. The estimated
public cost for familiarization, calculated in 2016 dollars at a 7
percent discount rate in perpetuity is as follows:
Annualized--$40.75
Present Value--$582.08
V. Executive Orders 12866 and 13563
    Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess
all costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). E.O.
13563 emphasizes the importance of quantifying both costs and benefits,
of reducing costs, of harmonizing rules, and of promoting flexibility.
This rule is a significant regulatory action and therefore, this rule
was subject to the review of the Office of Information and Regulatory
Affairs under section 6(b) of E.O. 12866. This rule is not a major rule
under 5 U.S.C. 804.
VI. Executive Order 13771
    This rule is considered an E.O. 13771 regulatory action. Details on
the expected impact on the public can be found in Section IV of this
preamble.
VII. Regulatory Flexibility Act
    DoD, GSA, and NASA do not expect this proposed rule to have a
significant economic impact on a substantial number of small entities
within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et
seq. However, an Initial Regulatory Flexibility Analysis (IRFA) has
been performed and is summarized as follows:
    The rule proposes to amend the Federal Acquisition Regulation
(FAR) to change the kinds of assets that individual sureties must
pledge as security for their individual surety bonds.
    The objective of the FAR rule is to implement section 874 of the
National Defense Authorization Act (NDAA) for Fiscal Year 2016
(FY16)(Pub. L. 114-92), which adds 31 U.S.C. 9310, Individual
sureties, which limits the security for an individual surety bond to
eligible obligations, i.e., cash and/or Government obligations. This
section was intended to strengthen coverage for individual sureties,
thereby mitigating risk to the Government. The legal basis for this
rule is 40 U.S.C. 121(c), 10 U.S.C. chapter 137, and 51 U.S.C.
20113.
    The proposed rule applies to all offerors and contractors who
wish to use an individual surety as security for bonds required
under a solicitation/contract for supplies or services (including
construction). The number of solicitations and contracts requiring
the submission of bid guarantees, performance, or payment bonds,
correlate roughly to the number of contract awards containing FAR
clause 52.228-11, Pledge of Assets. Based on FY 2017 data contained
in EDA, 8,603 DoD contract awards, containing FAR clause 52.228-11
with an obligated amount of over $35,000, were made to 1,990 unique
vendors; of these 1,672 were small business entities. These
contractors could be using corporate sureties under 28.202,
individual sureties under 28.203, or pledging the contractor's own
assets under 28.204; this FAR case only covers individual sureties
under 28.203. Therefore, based on contracting officers' experience
in the field DoD, GSA, and NASA estimate that less than 0.1 percent
of contractors are using individual sureties to meet the required
bonding under contracts.
    The proposed rule does not include additional reporting or
record keeping requirements. Although the proposed rule creates a
new provision to distinguish instructions to offerors from
instructions to a contractor by relocating the ``offeror'' language
from the existing FAR clause at 52.228-11, Pledge of Assets, the net
effect of projected reporting and recordkeeping is unchanged. The
use of Standard Form 28, Affidavit of Individual Surety, an existing
reporting requirement under 52.228-11, is covered under the Office
of Management and Budget (OMB) Control No. 9000-0001. The SF 28 is
revised as a result of this rule. However, this will have a
negligible impact on offerors, contractors, and respondents.
    The effect on small business is that individual sureties will no
longer be able to pledge real property, corporate stocks, corporate
bonds, or irrevocable letters of credit. DoD, GSA, and NASA
anticipate that some individual sureties may not want to transform
their assets into the kind that qualify under the new legislation,
and so there will be fewer individual sureties available to meet the
needs of small business offerors/contractors. This may mean that
some small businesses that have been using individual sureties will
have their costs change, as they go to a different individual
surety, or to a corporate surety.
    The rule does not duplicate, overlap, or conflict with any other
Federal rules.
    There are no available alternatives to the proposed rule to
accomplish the desired objective of the statute. DoD, GSA, and NASA
do not expect this proposed rule to have a significant economic
impact on a substantial number of small entities because this only
applies to (1) offerors and contractors who are using an individual
surety as security for bonds required under a solicitation/contract
for supplies or services (including construction), and (2)
individual sureties, a small number of whom may not want to
transform their assets into the kind that qualify under the new
legislation.
    The Regulatory Secretariat Division has submitted a copy of the
IRFA to the Chief Counsel for Advocacy of the Small Business
Administration. A copy of the IRFA may be obtained from the Regulatory
Secretariat Division. DoD, GSA and NASA invite comments from small
business concerns and other
[[Page 7914]]
interested parties on the expected impact of this rule on small
entities.
    DoD, GSA, and NASA will also consider comments from small entities
concerning the existing regulations in subparts affected by this rule
consistent with 5 U.S.C. 610. Interested parties must submit such
comments separately and should cite 5 U.S.C. 610 (FAR Case 2017-003) in
correspondence.
VIII. Paperwork Reduction Act
    The Paperwork Reduction Act (44 U.S.C. Chapter 35) does apply;
however, the proposed changes to the FAR do not impose additional
information collection requirements. This rule proposes to modify the
Standard Form (SF) 28, which is used by all executive agencies to
obtain information from individuals wishing to serve as sureties to
Government bonds. However, the modification merely updates the language
in the form to be consistent with the changes to the FAR text; it will
have no impact on offerors or contractors. The modification of the SF
28 does not impose additional information collection requirements to
the paperwork burden previously approved under OMB Control Number 9000-
0001, Standard Form 28, Affidavit of Individual Surety.
List of Subjects in 48 CFR Parts 19, 28, 32, 52, and 53
    Government procurement.
William F. Clark,
Director, Office of Government-wide Acquisition Policy, Office of
Acquisition Policy, Office of Government-wide Policy.
    Therefore, DoD, GSA, and NASA are proposing to amend 48 CFR parts
19, 28, 32, 52, and 53 as set forth below:
0
1. The authority citation for 48 CFR parts 19, 28, 32, 52, and 53
continues to read as follows:
    Authority:  40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 51
U.S.C. 20113.
PART 19--SMALL BUSINESS PROGRAMS
19.602-1   [Amended]
0
2. Amend section 19.602-1 by removing from paragraph (a) ``and
28.203(c))'' and adding ``and 28.203-1(e))'' in its place.
PART 28--BONDS AND INSURANCE
28.102-2   [Amended]
0
3. Amend section 28.102-2 by removing from paragraph (e) ``of 28.203-
5(c)'' and adding ``of 28.203-3(c)'' in its place.
0
4. Amend section 28.106-1 by removing paragraph (o); redesignating
paragraph (p) as paragraph (o); and revising the new redesignated
paragraph (o) to read as follows.
28.106-1   Bonds and bond related forms.
* * * * *
    (o) OF 91, Release of Personal Property from Escrow (see 28.203-3).
0
5. Amend section 28.202 by--
0
a. Revising paragraph (a)(1);
0
b. Revising the first sentence of paragraph (a)(2);
0
c. Removing from paragraph (a)(3) ``Department of the Treasury
regulations'' and adding ``Department of the Treasury (Treasury)
regulations'' in its place;
0
d. Removing from paragraph (a)(4) ``Standard Form 273'', ``Standard
Form 274'' and ``Standard Form 275'' and adding ``Standard Form (SF)
273'', ``SF 274'', and ``SF 275'' in their places, respectively
0
e. Revising the first sentence of paragraph (c); and
0
f. Revising paragraph (d) to read as follows:
28.202   Acceptability of corporate sureties.
    (a)(1) Corporate sureties offered for bonds furnished with
contracts performed in the United States or its outlying areas must
appear on the list contained in the Department of the Treasury's
Listing of Approved Sureties (Treasury Department Circular 570),
``Companies Holding Certificates of Authority as Acceptable Sureties on
Federal Bonds and as Acceptable Reinsuring Companies.''
    (2) The penal amount of the bond should not exceed the surety's
underwriting limit stated in the Treasury Department Circular 570. * *
*
* * * * *
    (c) Treasury issues supplements to Treasury Department Circular
570, notifying all Federal agencies of new approved corporate surety
companies and the termination of the authority of any specific
corporate surety to qualify as a surety on Federal bonds. * * *
    (d) Treasury Department Circular 570 may be obtained from the U.S.
Department of the Treasury, Bureau of the Fiscal Service, Surety Bond
Branch, 3201 Pennsy Drive, Building E, Landover, MD 20785. Or via the
internet at https://www.fiscal.treasury.gov/fsreports/ref/suretyBnd/c570.htm.
0
6. Revise the section 28.203 to read as follows:
28.203   Individual sureties.
28.203-1   Acceptability of individual sureties.
    (a) An individual surety is acceptable for all types of bonds
except position schedule bonds.
    Assets pledged by an individual surety shall meet the eligibility
requirements of Treasury's Bureau of the Fiscal Service. Per 31 U.S.C.
9310, individual sureties must pledge eligible obligations, which
Treasury refers to as acceptable collateral or eligible collateral. A
list of acceptable assets, entitled ``Acceptable Collateral for 31 CFR
PART 225,'' is available at https://www.treasurydirect.gov/instit/statreg/collateral/2018Final225ListofAcceptableCollateral.pdf.
    (b)(1) An individual surety shall execute the bond (e.g., bid bond
(SF 24), performance bond (SF 25), payment bond (SF 25A)).
    (2) The net adjusted value of unencumbered assets is their market
value minus the margin. The margin tables are available at
www.treasurydirect.gov. The net adjusted value of unencumbered assets
pledged by the individual surety must equal or exceed the penal amount
(i.e., face value) of each bond.
    (3) The individual surety shall execute the SF 28, Affidavit of
Individual Surety, and provide a security interest. One individual
surety is adequate support for a bond, provided the net adjusted value
of unencumbered assets pledged by that individual surety equals or
exceeds the amount of the bond.
    (4) An offeror or contractor may submit up to three individual
sureties for each bond, in which case the net adjusted value of the
pledged unencumbered assets, when combined, must equal or exceed the
penal amount of the bond. Each individual surety is jointly and
severally liable to the extent of the penal amount of the bond.
    (c) Using the information from the SF 28 submitted by the offeror
or contractor, the contracting officer shall notify the Treasury's
collateral operations support team by email at [email protected]
or by phone at 888-568-7343, of the individual surety, the assets to be
pledged, and the amount necessary to cover the individual surety bond,
i.e., the required amount to be collateralized. If after 3 business
days the contracting officer has not received a response from Treasury,
the contracting officer may seek assistance from the Director, Bank
Policy and Oversight, at 202-504-3502. Treasury will advise the
contracting officer whether the assets are eligible to be pledged,
consistent with 28.203-1(a), and of the valuation of the assets offered
to be pledged, consistent with the valuation standards in 28.203-
1(b)(2). The contracting officer shall determine whether the individual
surety bond is acceptable as to the amount necessary to
[[Page 7915]]
cover the individual surety bond based on the asset eligibility and
valuation assessment from Treasury. The contracting officer shall
notify both the offeror or contractor and the individual surety of this
determination.
    (d) If the contracting officer determines the individual surety is
acceptable, the contracting officer shall request the Treasury's
collateral operations support team set up the necessary individual
surety pledged asset collateral account.
    (e) If the contracting officer determines that no individual surety
in support of a bid guarantee is acceptable, the offeror utilizing the
individual surety shall be rejected as nonresponsible, except as
provided in 28.101-4. A finding of nonresponsibility based on
unacceptability of an individual surety, need not be referred to the
Small Business Administration for a Certificate of Competency. (See
19.602-1(a) and 61 Comp. Gen. 456 (1982).)
    (f) If a contractor submits an unacceptable individual surety, or
one that Treasury could not assess the asset eligibility and valuation
within a reasonable time, then the contracting officer may permit the
contractor to substitute an acceptable surety within a reasonable time.
    (g) Evidence of possible criminal or fraudulent activities by an
individual surety shall be referred to the appropriate agency official
in accordance with agency procedures.
28.203-2   Substitution of assets.
    An individual surety may request the Government to accept a
substitute asset for that currently pledged by submitting a written
request, including a revised SF 28, to the responsible contracting
officer. Following the requirements set forth in 28.203-1, the
contracting officer may agree to the substitution of assets upon
determining, that the substitute assets to be pledged are adequate to
protect the outstanding bond or guarantee obligations.
28.203-3   Release of security interest.
    (a) After consultation with legal counsel, the contracting officer
shall release the security interest on the individual surety's assets
using the Optional Form 91, Release of Personal Property from Escrow,
or a similar release as soon as possible consistent with the conditions
in subparagraphs (a) (1) and (2) of this section. A surety's assets
pledged in support of a payment bond may be released to a subcontractor
or supplier upon Government receipt of a Federal district court
judgment, or a sworn statement by the subcontractor or supplier that
the claim is correct along with a notarized authorization of the
release by the surety stating that it approves of such release.
    (1) Contracts subject to the Bonds statute. See section 1.110 and
paragraph (a) of section 28.102-1. The security interest shall be
maintained for the later of (i) one year following final payment, (ii)
until completion of any warranty period (applicable only to performance
bonds), or (iii) pending resolution of all claims filed against the
payment bond during the 1 year period following final payment.
    (2) Contracts subject to alternative payment protection. See
paragraph (b)(1) of section 28.102-1. The security interest shall be
maintained for the full contract performance period plus one year.
    (3) Other contracts not subject to the Bonds statute. The security
interest shall be maintained for 90 days following final payment or
until completion of any warranty period (applicable only to performance
bonds), whichever is later.
    (b) Upon written request by the individual surety, the contracting
officer may release the security interest on the individual surety's
assets in support of a bid guarantee based upon evidence that the offer
supported by the individual surety will not result in contract award.
    (c) Upon written request by the individual surety, the contracting
officer may release a portion of the security interest on the
individual surety's assets based upon substantial performance of the
contractor's obligations under its performance bond. Release of the
security interest in support of a payment bond must comply with the
subparagraphs (a)(1) through (3) of this section. In making this
determination, the contracting officer will give consideration as to
whether the unreleased portion of the security is sufficient to cover
the remaining contract obligations, including payments to
subcontractors and other potential liabilities. The individual surety
shall, as a condition of the partial release, furnish an affidavit
agreeing that the release of such assets does not relieve the
individual surety of its obligations under the bond(s).
28.203-4   Solicitation provision and contract clause.
    (a) Insert the provision at 52.228-XX, Individual Surety--Pledge of
Assets (Bid Guarantee), in solicitations which require the submission
of a bid guarantee.
    (b) Insert the clause at 52.228-11, Individual Surety--Pledge of
Assets, in solicitations and contracts which require the submission of
performance, or payment bonds.
28.203-5   Exclusion of individual sureties.
    (a) An individual may be excluded from acting as a surety on bonds
submitted by offerors on procurement by the executive branch of the
Federal Government, by the acquiring agency's head or designee
utilizing the procedures in subpart 9.4. The exclusion shall be for the
purpose of protecting the Government.
    (b) An individual may be excluded for any of the following causes:
    (1) Failure to fulfill the obligations under any bond.
    (2) Failure to disclose all bond obligations.
    (3) Misrepresentation of the value of available assets or
outstanding liabilities.
    (4) Any false or misleading statement, signature or representation
on a bond or affidavit of individual suretyship.
    (5) Any other cause affecting responsibility as a surety of such
serious and compelling nature as may be determined to warrant
exclusion.
    (c) An individual surety excluded pursuant to this section shall be
entered as an exclusion in the System for Award Management (see 9.404).
    (d) Contracting officers shall not accept the bonds of individual
sureties whose names appear in an active exclusion record in the System
for Award Management (see 9.404), unless the acquiring agency's head or
a designee states in writing the compelling reasons justifying
acceptance.
    (e) An exclusion of an individual surety under this section will
also preclude such party from acting as a contractor in accordance with
subpart 9.4.
28.204   [Amended]
    7. Amend section 28.404 by removing from paragraph (b) ``lien in
28.203-5(c)'' and adding ``security in 28.203-3(c)'' in its place.
28.204-1   [Amended]
0
8. Amend section 28.204-1 by removing from the first sentence of the
text ``dated July 1, 1978''.
PART 32--CONTRACT FINANCING
32.202-4   [Amended]
0
9. Amend section 32.202-4 by removing from paragraph (c) ``28.203-2,
28.203-3, and'' and adding ``28.203 and'' in its place.
[[Page 7916]]
PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES
0
10. Add section 52.228-XX to read as follows:
52.228-XX   Individual Surety--Pledge of Assets (Bid Guarantee).
    As prescribed in 28.203-4(a), insert the following provision:
Individual Surety--Pledge of Assets (Bid Guarantee) (Date)
    (a) Offerors shall obtain from each person acting as an
individual surety on a bid guarantee--
    (1) A pledge of assets that meets the eligibility, valuation,
and security requirements described in the Federal Acquisition
Regulation (FAR) 28.203-1; and
    (2) Standard Form 28, Affidavit of Individual Surety.
    (b) The Offeror shall include with its offer the information
required at paragraph (a) of this provision within the time frame
specified in the provision at FAR 52.228-1, Bid Guarantee, or as
otherwise established by the Contracting Officer.
    (c) The Contracting Officer may release the security interest on
the individual surety's assets in support of a bid guarantee based
upon evidence that the offer supported by the individual surety will
not result in contract award.
    (End of provision)
0
11. Revise section 52.228-11 and section heading to read as follows:
52.228-11   Individual Surety--Pledges of Assets.
    As prescribed in 28.203-4(b), insert the following clause:
Individual Surety--Pledges of Assets (Date)
    (a) The Contractor shall obtain from each person acting as an
individual surety on a performance bond or a payment bond--
    (1) A pledge of assets that meets the eligibility, valuation,
and security requirements described in the Federal Acquisition
Regulation (FAR) 28.203-1; and (2) Standard Form 28, Affidavit of
Individual Surety.
    (b) The Contracting Officer may release a portion of the
security interest on the individual surety's assets based upon
substantial performance of the Contractor's obligations under its
performance bond. The security interest in support of a performance
bond shall be maintained--
    (1) Contracts for the construction, alteration, or repair of any
public building or public work of the Federal Government exceeding
$150,000 (40 U.S.C. 3131). Until completion of any warranty period,
or for one year following final payment, whichever is later.
    (2) Contracts subject to alternative payment protection (see FAR
28.102-1(b)(1)). For the full contract performance period plus one
year.
    (3) Other contracts not subject to the requirements of paragraph
(b)(1) of this clause. Until completion of any warranty period, or
for 90 days following final payment, whichever is later.
    (c) A surety's assets pledged in support of a payment bond may
be released to a subcontractor or supplier upon Government receipt
of a Federal district court judgment, or a sworn statement by the
subcontractor or supplier that the claim is correct along with a
notarized authorization of the release by the surety stating that it
approves of such release. The security interest on the individual
surety's assets in support of a payment bond shall be maintained--
    (1) Contracts for the construction, alteration, or repair of any
public building or public work of the Federal Government exceeding
$150,000 which require performance and payment bonds (40 U.S.C.
3131). For one year following final payment, or until resolution of
all pending claims filed against the payment bond during the 1-year
period following final payment, whichever is later.
    (2) Contracts subject to alternative payment protection (see FAR
28.102-1(b)(1)). For the full contract performance period plus one
year.
    (3) Other contracts not subject to the requirements of paragraph
(c)(1) of this clause. For 90 days following final payment.
    (d) The Contracting Officer may allow the Contractor to
substitute an individual surety, for a performance or payment bond,
after contract award. The Contractor shall comply with the
requirements of paragraph (a) of this clause within the time frame
established by the Contracting Officer.
    (End of clause)
PART 53--FORMS
53.228   [Amended]
0
12. Amend section 53.228 by--
0
a. Removing from paragraph (e) ``(Rev. 6/2003)'' and ``28.203(b).)''
and adding ````(Rev. Date)'' and ``28.203-1(b)(3).)'' in their places,
respectively;
0
b. Removing paragraph (o);
0
c. Redesignating paragraph (p) as paragraph (o); and
0
d. Removing from the newly redesignated paragraph (o) ``(See 28.106-
1(p) and 28.203-5(a).)'' and adding ``(See 28.106-1(o) and 28.203-
3(a).)'' in its place.
53.300   [Amended]
0
13. Amend section 53.300 by removing from the table 53-1 in paragraph
(a) ``OF 90 Release of Lien on Real Property.''
[FR Doc. 2020-02655 Filed 2-11-20; 8:45 am]
 BILLING CODE 6820-EP-P