Federal Acquisition Regulation: Individual Sureties

Published date12 February 2020
Citation85 FR 7910
Record Number2020-02655
SectionProposed rules
CourtGeneral Services Administration,National Aeronautics And Space Administration
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
                

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