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  [Section]{.underline}   [Topics in the Section]{.underline}                        [Page]{.underline}

  **A**                   **Bonds and Insurance**                                    

  1                       General Requirements                                       1

  2                       Bid Proposal Guarantees                                    1

  3                       Bonds                                                      2

  4                       Insurance                                                  7

  5                       Definitions                                                10

  **B**                   **Clauses**                                                11

  **C**                   **Forms**                                                  12
  ----------------------- ---------------------------------------------------------- --------------------

**A. BONDS AND INSURANCE**

**1.** **GENERAL REQUIREMENTS**

Bonds, guarantees and insurance requirements will:

a\. Comply with requirements of law found in the Miller Act;

b\. Provide methods to obtain financial protection against damages to
the FAA in all forms of contracts including bid/proposal guarantees,
bonds, sureties and insurance which are not covered by the Miller Act;

c\. Allow the contracting officer discretion to set appropriate bond
levels to protect the FAA\'s interest;

d\. Establish contracts that allow the contracting officer flexibility
to increase bond amounts based upon contract changes;

e\. Encourage the use of corporate, rather than individual, sureties;

f\. Allow flexibility in the types of security for bonds; encourage
avoidance of termination for default through consideration of surety
takeover when contractors are not performing;

g\. provide the CO flexibility to tailor clauses to the specific
situation provided that they remain in compliance with the Miller Act.

**2. BID PROPOSAL GUARANTEES**

a\. Bid/proposal guarantees (referred to as guarantee(s) are relevant to
performance bonds only. The contracting officer may determine the dollar
amount of acquisitions that will apply to bid/proposal guarantees.

b\. *Amount.* The contracting officer should determine a guarantee
amount that is adequate to protect the Government from loss should the
successful bidder fail to sign the contract or obtain required bonds.
The guarantee amount should be at least 20 percent of the bid price and
should not exceed \$3 million. When the penal sum is expressed as a
percentage, a maximum dollar limitation may be stated. For indefinite
delivery contracts, the amount of any guarantee should be a specific
amount equal to the largest single order that the contracting officer
estimates will be placed under the contract, or another amount that the
CO deems necessary to protect the interest of the FAA.

c\. Failure to submit required bid/proposal guarantee. It is preferable
for offerors to submit their guarantees with the proposals. However, the
CO may determine the final cut-off for receipt of guarantees. Also, if a
guarantee is proposed at an amount less than the solicitation specifies,
but is equal to or greater than the difference between the proposal
price and the price of the next-higher proposal, the guarantee may be
accepted.

d\. *Waiving Bid/Proposal Guarantees*. The contracting officer may waive
the requirement to obtain a guarantee when a performance bond or a
performance and payment bond is required if it is determined that a
guarantee is not in the best interest of the Federal Aviation
Administration (FAA) for a specific acquisition (e.g., overseas
construction, emergency acquisitions).

e\. *Screening Information Request (SIR) Requirements.* SIR's should
describe guarantee requirements in sufficient detail for offerors to
determine the amount of the required guarantee.

**3. BONDS**

a\. *General.*

\(1\) *Requirement .* Bonds are not generally applicable to
non-construction contracts but may be used if the contracting officer
determines that such bonds are necessary to protect the interests of the
FAA. The Miller Act (30 U.S. C. 410(b)(4)(B) requires performance and
payment bonds for construction contracts exceeding \$25,000. The
contracting officer may waive performance and payment bonds as
authorized by the Miller Act or other law if in the best interest of the
Government.

\(2\) *SIR Requirements.* The SIR should describe the bond requirements.

\(3\) *Penal Amount*. The penal amount should reflect the minimum amount
needed to protect the FAA's interests.

\(4\) *Additional Amounts of Protection.* The contracting officer may
increase the bond requirements if the contract amount increases and the
contracting officer deems it to be in the best interest of the FAA.

\(5\) *Notice to Proceed*. If the contract requires bonds, insurance,
reinsurance or other forms of protection, the contractor must furnish
them to the contracting officer in the time specified in the schedule.
The contracting officer may consider these submissions in determining
when to issue a notice to proceed.

\(6\) *Original Copy.* An original signed copy of any bond must be
retained in the solicitation or contract file.

\(7\) *Authority of Agents.* Bonds signed by persons acting in a
representative capacity must be accompanied by proof that the agent is
authorized to act in that capacity. Proof may be a notarized power of
attorney, or a properly executed corporate certificate or resolution,
attested to by the corporate secretary.

\(8\) *Partnership as Principal.* When a partnership is a principal, the
names of all members of the firm must be listed in the bond, following
the trade name of the firm(if any) and the phrase "a partnership
composed of ." When a corporation is a principal, the state of the
incorporation should be listed.

\(9\) *Date.* Unless an annual bond is accepted, performance or payment
bonds should be dated after the date of the contract.

\(10\) *Furnishing Information to Subcontractors and Suppliers Under
Payment Bonds*. When a payment bond has been provided, the contracting
officer may furnish the name and address of the surety or sureties to
persons who have furnished, or have been requested to furnish, labor or
materials for use in performing the contract. The contracting officer
may furnish additional general information on such matters as the
progress of work, the payments made, and the estimated percentage of
completion.

\(11\) *Contract Increases*. When a contract price is increased or scope
changes, the FAA may require additional bond protection in an amount
adequate to protect suppliers of labor and material. Both the contractor
and sureties should execute a consent of surety increasing the penal
amount and submit it to the CO.

\(12\) *Surety Changes.* The original surety must execute a consent of
surety in instances where an increased bond amount is obtained from a
party other than the original surety.

\(13\) *Novations.* Novations require a consent of surety.

b\. *Construction Contracts - Performance and Payment Bonds*

\(1\) *Penal Sums*

\(a\) *Requirements Contracts*. When determining the penal sum of bonds
for requirements contracts, the contracting officer may consider the
contract price to be the price payable for the estimated quantity.

\(b\) *Indefinite Quantity Contracts*. When determining the penal sum of
bonds for indefinite-quantity contracts, the contracting officer should
consider the contract price to be the price payable for the specified
minimum quantity. When the minimum quantity is exceeded, additional
amounts of performance and payment protection may be obtained as stated
under performance and payment bond.

\(2\) *Performance Bonds*

\(a\) *Penal Amounts*. Penal amounts should generally be 100 percent of
the original contract price, unless the contracting officer determines
that a lesser amount would be adequate for the protection of the FAA. If
a lesser amount is used, the clauses should be tailored to the
situation.

\(b\) *Additional Amounts of Protection*. The contracting officer may
increase the amount up to 100 percent of the increase in contract price.

\(3\) *Payment Bonds*

\(a\) *Requirement*. A payment bond is required only when a performance
bond is required but may be used without a performance bond if the
contracting officer deems the use of payment bond to be in the FAA\'s
interest. Examples of situations where a payment bond may be needed
include:

\(i\) Supplies or services are unique to the FAA that can be obtained
only from a source that is not the producer of the supplies or services

\(ii\) A contractor has sold all its assets to, or merged with, another
firm and the FAA needs assurance of the new firm's responsibility

\(iii\) Uninterrupted provision of the supplies or services is essential
to the continued operation of FAA functions.

\(b\) *Penal Amounts*. Penal amounts should generally be equal to:

\(i\) 50 percent of the contract price if the contract price is not more
than \$1 million;

\(ii\) 40 percent of the contract price if the contract price is more
than \$1 million but not more than \$5 million; or

\(iii\) \$2 1/2 million if the contract price is more than \$5 million.

\(c\) *Additional Amounts of Protection*. If the original contract price
is \$5M or less, the contracting officer may require additional
protection if the contract price is increased. The penal amount of the
total protection as revised should meet the requirements stated in penal
amounts for payment bonds above.

\(d\) *Furnishing Information to Subcontractors and Suppliers*. The
contracting officer may furnish the name and address of the surety or
sureties to persons who have furnished, or have been requested to
furnish, labor or materials for use in performing the contract. The CO
may furnish additional general information on such matters as the
progress of work, the payments made and the estimated percentage of
completion, if available.

c\. *Other Than Construction Contracts -Performance and Payment Bonds*

\(1\) *Annual Performance Bonds (APB)*. APB may be used for
nonconstruction contracts only and should be applicable to the total of
all covered contracts. The bond may be modified to cover new
requirements.

\(2\) *Performance Bonds*. Performance bonds may be used if the
contracting officers deems it necessary to protect the FAA's interest.
The following situations may warrant a performance bond:

\(a\) FAA property or funds are to be provided to the contractor for use
in performing the contract or as partial compensation (as in retention
of salvaged material).

\(b\) A contractor sells assets to or merges with another concern, and
the FAA after recognizing the latter concern as the successor in
interest, desires assurance that it is financially capable.

\(c\) Substantial payments are made before delivery of end items starts.

\(d\) Contracts are for dismantling, demolition, or removal of
improvements.

\(3\) *Payment Bonds*. A payment bond is required only when a
performance bond is required and if the contracting officer deems the
use of payment bond to be in the FAA\'s interest.

d\. *Other Types of Bonds*. The contracting officer may use other types
of bonds, such as patent infringement bonds (Clause 3.4.1-8, Patent
Infringement Bond Requirements), deemed necessary to protect the
interests of the FAA.

e\. *Sureties.* This subsection describes the use of sureties to protect
the Government from financial losses.

\(1\) *Requirements for Sureties*. Bonds must be supported by acceptable
corporate sureties, or by assets acceptable as security for the
contractor's obligation. The Contracting Officer should assure that
adequate security for bonds is obtained to protect the interest of the
FAA.

\(2\) *Corporate Sureties*. Corporate sureties must appear on the list
contained in the Department of Treasury Circular 570, "Companies Holding
Certificates of Authority as Acceptable Sureties on Federal Bonds and
Acceptable Reinsuring Companies." The amount of the bond may not exceed
the underwriting limit stated for the surety in that list. Upon receipt
of notification of termination of a company\'s authority to qualify as a
surety on Federal bonds, the contracting officer shall review the
outstanding contracts and take action necessary to protect the
Government, including, where appropriate, securing new bonds with
acceptable sureties in lieu of outstanding bonds with the named company.

\(3\) *Individual Sureties.* Individual sureties are discouraged

\(4\) *Alternative Security*. Alternative security is not permitted for
payment bonds for construction contracts. For other than payment bonds
for construction contracts, the CO may accept the following alternative
security in place of bonds and require the deposit of the assets as
specified herein. Further, for bonds that do not use sureties as the
security for the bond, the bond should include a statement pledging and
identifying the security that will be used to support the bond. The
contractor shall execute the bond form as the principal. Other types of
alternative security than those described herein may not be used. The
following are considered to be acceptable assets are:

\(a\) *Bonds or Notes*. U.S. bonds or notes maturing in less than 5
years from the date of contract, together with an agreement authorizing
collection or sale in the event of default may be used. The par value of
the bonds or notes must be at least equal to the penal amount of the
bond. U.S. bonds or notes should be deposited in an amount equal at
their par value to the penal sum of the bond (the Act of February 24,
1919 (31 U.S.C. 9303) and Treasury Department Circular No. 154 dated
July 1, 1978 (31 CFR Part 225)). The CO may turn the securities over to
a designated agency official or deposit them with the Treasurer of the
U.S. or other institution designated by the Treasurer*.*

\(b\) *Other Types of Assets*. Certified check, cashier's check, bank
draft, postal money order, or an irrevocable, unconditional letter of
credit (see OFPP Pamphlet No,7 "Guidance for Implementing Policy Letter
91-4" as guidance for using irrevocable letters of credit) issued by a
federally insured financial institution is another type of asset that
may be used as security. The deposit must be at least equal to the penal
amount of the surety bond, and payable solely to the order of the FAA.
The CO must deposit checks and drafts made out to the FAA with the
designated official in the FAA with instructions to hold the funds for
the benefit of the contractor. The procuring activity should establish
records to account for all deposited items, such as the requiring the
senior CO of the procuring activity to keep a perpetual inventory of all
deposited items.

\(c\) *Bond Representations*. When the contractor pledges assets instead
of providing a surety bond, the contractor must complete the bond form
as principal and the bond form must describe the assets pledged.

\(5\) *Contract Administration.*

\(a\) *Information and Notices to Surety(ies)*. The CO may furnish the
following information to each surety upon request:

\(i\) correspondence related to -terminations, renewals,-nonperformance;

\(ii\) information indicating the surety's potential liability for
contractor's performance failure such as notice of impending
termination, demand for adequate assurances, assessment of liquidated,
or other damages;

\(iii\) claims against the surety based upon the contractor's failure to
perform that addresses the reasons and amount of the claim. Legal
assistance may be engaged if the surety fails to pay.

The CO may also provide other information in response to requests
related to contractor performance and payment.

\(b\) *Surety Takeover in Performance Failure*. The CO may consider any
surety proposal to complete the work prior to terminating a contract.
The CO may allow the surety to complete the work if the CO has reason to
believe that the firms or individuals proposed by the surety are capable
to perform the work.

\(c\) *Contract Completion.*

\(i\) *Certificate of Completion*. After the contractor has met all the
contractual obligations, the CO may issue a Certificate of Completion to
any surety. The certificate's terms may not release the surety from
obligation under a payment bond.

\(ii\) *Asset Refund*. If alternative security was furnished, the CO
should refund the assets under a payment bond upon completion of the
work and receipt of a contractor's release.

\(iii\) *Substantial Completion Under Construction Contracts*. Upon
request, the CO should furnish a Certificate of Substantial Completion
to sureties of a construction contractor if the project has been
determined to be substantially complete.

**4. INSURANCE**

a\. *Requirement*. Contractors may be required to carry insurance when
necessary to protect the interests of the FAA. The FAA CO must review
insurance for use under the contract and may refuse insurance that is
not in the FAA's interest. The CO should consider the insurance
validation when issuing a Notice to Proceed. Examples that could require
insurance are:

\(1\) Any contractor subject to Cost Accounting Standard (CAS) 416 (48
CFR 9004.416 is required to obtain insurance, by purchase or
self-coverage, for the perils to which the contractor is exposed, except
when (i) the Government agrees by contract to indemnify the contractor
or relieves the contractor of liability for loss or damage to Government
property.

\(2\) Contractors, whether or not their contracts are subject to CAS
416, are required by law and this regulation to provide insurance for
certain types of perils (e.g., workers\' compensation). Insurance is
mandatory also when commingling of property, type of operation,
circumstances of ownership, or condition of the contract make it
necessary for the protection of the Government.

\(3\) Contractors awarded nonpersonal services contracts for health
services are required to maintain medical liability insurance and
indemnify the Government for liability producing acts or omissions by
the contractor, its employees and agents.

In addition, the CO may require other insurance as deemed necessary to
protect the Government.

b\. *Insurance Under Fixed-Price*

\(1\) *General*. Although the FAA is not ordinarily concerned with the
contractor\'s insurance coverage if the contract is a fixed-price
contract, in special circumstances contracting officer may specify
insurance requirements under fixed-price contracts. Examples of such
circumstances include the following:

\(a\) The contractor is, or has a separate operation, engaged
principally in FAA work.

\(b\) FAA property is involved.

\(c\) The work is to be performed on a FAA facility.

\(d\) The FAA elects to assume risks for which the contractor ordinarily
obtains commercial insurance.

\(2\) *Work on a FAA Installation*. The CO may include contract clause
3.4.1-10, Insurance-Work on a Federal Aviation Administration
Installation in a fixed-price contract for work to be performed on a
Government installation unless:

\(a\) only a small amount of work is required on the FAA site

\(b\) all work on the FAA site is to be performed outside the United
States.

The coverage specified is the minimum insurance required and should be
included in the contract schedule or elsewhere in the contract. The
contracting officer may require additional coverage and higher limits.

When the clause, Insurance-Work on a Federal Aviation Administration
Facility, is not required but is included because the contracting
officer considers it to be in the FAA\'s interest to do so, any of the
types of insurance specified in d. below, Amounts and Types of
Insurance, may be omitted or the limits may be lowered, if appropriate.

c\. *Insurance Under Non-Fixed-Price Contracts.*

\(1\) *Coverage*. Insurance referred to below in d. Amounts and Types of
Insurance, below, is required for non-fixed-price contracts in both
prime and subcontracts. Cost-reimbursement contracts (and subcontracts,
if the terms of the prime contract are extended to the subcontract)
ordinarily require the types of insurance listed in d below.

\(2\) *Professional services contracts (PSC)*. PSC should require errors
and omissions insurance described below in f. Errors and Omissions
Insurance.

d\. *Amounts and Types of Insurance.*

\(1\) *Workers' Compensation and Employers' Liability Insurance*.
Compliance with applicable workers' compensation and occupational
disease statutes is required, and employers' liability coverage must be
obtained when available. If occupational diseases are not compensable by
law, the contractor must carry insurance for occupational disease under
the employers' liability section of the insurance policy. Employer's
liability coverage of at least \$100,000 is required where possible. The
CO may modify recommended amounts stated herein, as deemed in the best
interest of the FAA, if not in violation of statute and locality or
governmental requirements.

\(2\) *General Liability Insurance.*

\(a\) *Bodily injury*. The contractor must carry bodily injury liability
insurance, with minimum limits of \$100,000 per person and \$500,000 per
occurrence.

\(b\) *Property*. The CO may require property damage liability in an
amount to be determined by the contracting officer as deemed appropriate
to the contract.

\(3\) *Automobile Liability Insurance*. The contracting officer shall
require automobile liability insurance written on the comprehensive form
of policy. The policy shall provide for bodily injury and property
damage liability covering the operation of all automobiles used in
connection with performing the contract. Policies covering automobiles
operated in the United States shall provide coverage of at least
\$200,000 per person and \$500,000 per occurrence for bodily injury and
\$20,000 per occurrence for property damage.

e\. *Self-Insurance*. The CO may approve a qualified program of
self-insurance covering any kind of liability in place of any type of
insurance discussed above in d., Amounts and Types of Insurance,
Paragraph 4, if it is in the best interest of the FAA. Self insurance
shall not apply to catastrophic risk. In jurisdictions where workers'
compensation does not completely cover employers' liability to
employees, a program of self-insurance for workers' compensation may be
approved if:

\(1\) the contractor also maintains an approved program of
self-insurance for any employer's liability that is not covered; or

\(2\) the contractor has shown that the combined cost to the FAA of
self-insurance for workers' compensation and commercial insurance for
employers' liability should not exceed the cost of covering both kinds
of risks by commercial insurance.

f\. *Errors and Omissions Insurance.*

\(1\) *Professional Services Contractors*. The CO may require
professional services contracts such as the following categories to have
errors and omissions (malpractice) (E&O) insurance:

\(a\) accountants

\(b\) architects

\(c\) engineers

\(d\) fiscal agents

\(e\) medical doctors and dentists.

For other professional services besides those listed above, the CO may
require E&O insurance when in the interest of the FAA.

\(2\) *Amount*. Insurance coverage should be at least \$200,000, unless
the contracting officer determines that a different limit is needed in
the interest of the FAA.

\(3\) *Waiver*. The CO may waive the requirement for errors and
omissions insurance in whole or in part, with the concurrence of
assigned counsel.

\(4\) *Insurance Policies*. If an existing policy is amended to cover
the FAA's requirements, the FAA shall be named as a loss payee.

\(5\) *Notice of Cancellation and Change*. Insurance policies other than
E&O must contain an endorsement to the effect that a cancellation of or
material change in policy that adversely affects the interest of the FAA
should not be effective until at least 30 days after the written notice
of cancellation or change is given to the CO.

g\. *Notice to Proceed*. If the contract requires bonds, insurance,
reinsurance or other forms of protection, the contractor must furnish
them to the contracting officer in the time specified in the schedule.
The contracting officer may consider these submissions in determining
when to issue a notice to proceed.

**5. DEFINITIONS**

a\. *'Attorney-in-fact,\'* as used in this part, means an agent,
independent agent, underwriter, or any other company or individual
holding a power of attorney granted by a surety (see also \'power of
attorney\').

b\. *\'Bid guarantee\'* means a form of security assuring that the
bidder (a) will not withdraw a bid within the period specified for
acceptance and will execute a written contract and furnish required
bonds, including any necessary coinsurance or reinsurance agreements,
within the time specified in the bid, unless a longer time allowed,
after receipt of the specified forms.

c\. *'Bond\'* means a written instrument executed by a bidder or
contractor (the \'principal\'), and a second party (the \'surety\' or
\'sureties\'), to assure fulfillment of the principal\'s obligations to
a third party (the \'obligee\' or \'Federal Aviation Administration\'),
identified in the bond. If the principal\'s obligations are not met, the
bond assures payment, to the extent stipulated, of any loss sustained by
the obligee. The types of bonds and related documents are as follows:

\(1\) An advance payment bond secures fulfillment of the contractor\'s
obligations under an advance payment provision.

\(2\) An annual bid bond is a single bond furnished by a bidder, in lieu
of separate bonds, which secure all bids (on other than construction
contracts) requiring bonds submitted during a specific FAA fiscal year.

\(3\) An annual performance bond is a single bond furnished by a
contractor, in lieu of separate performance bonds, to secure fulfillment
of the contractor\'s obligations under contracts (other than
construction contracts) requiring bonds entered into during a specific
FAA fiscal year.

\(4\) A patent infringement bond secures fulfillment of the
contractor\'s obligations under a patent provision.

\(5\) A payment bond assures payments as required by law to all persons
supplying labor or material in the prosecution of the work provided for
in the contract.

\(6\) A performance bond secures performance and fulfillment of the
contractor\'s obligations under the contract.

d\. *\'Consent of surety\'* means an acknowledgment by a surety that its
bond given in connection with a contract continues to apply to the
contract as modified.

e\. *\'Insurance,\'* as used in this part, means a contract which
provides that for a stipulated consideration, one party undertakes to
indemnity another against loss, damage, or liability arising from an
unknown or contingent event.

f\. *\'Penal sum\'* or *'penal amount'* means the amount of money
specified in a bond (or a percentage of the bid price in a bid bond) as
the maximum payment for which the surety is obligated.

g\. *\'Power of attorney,\'* as used in this part, means the authority
given one person or corporation to act for and obligate another, as
specified in the instrument creating the power; in corporate suretyship,
an instrument under seal which appoints an attorney-in-fact to act in
behalf of a surety company in signing bonds (see also
*\'attorney-in-fact\'*).

h\. *\'Reinsurance\'* means a transaction which provides that a surety
for a consideration, agrees to indemnify another surety against loss
which the latter may sustain under a bond which it has issued.

\'Surety\' means an individual or corporation legally liable for the
debt, default, or failure of a principal to satisfy a contract
obligation. The types of sureties referred to are as follows:

\(1\) An individual surety is one person, as distinguished from a
business entity, who is liable for the entire penal amount of the bond.

\(2\) A corporate surety is licensed under various insurance laws and,
under its charter, has legal power to act as surety for others.

\(3\) A cosurety is one of two or more sureties that are jointly liable
for the penal sum of the bond. A limit of liability for each surety may
be stated.

**B. CLAUSES**

3.4.1-1, Proposal Guarantee

3.4.1-2, Deposit of Assets

3.4.1-3, Immunity from Tort Liability

Alternate I

Alternate II.

3.4.1-4, Performance Bond Requirement

3.4.1-5, Payment Bond Requirement

3.4.1-6, Additional Bond Security

3.4.1-7, Notice to Proceed

3.4.1-8, Patent Infringement Bond Requirements

3.4.1-9, Deposit of Assets Instead of Surety Bonds.

3.4.1-10, Insurance - Work on an Federal Aviation Administration
Installation

3.4.1-11, Insurance-Liability to Third Persons

Alternate I

Alternate II

3.4.1-12, Insurance

3.4.1-13, Errors and Omission

**C. FORMS**

SF 24, Bid Bond

SF 25, Performance Bond

SF 25-A, Payment Bond

SF 25-B, Continuation Sheet

SF 28, Affidavit of Individual Surety

SF 34, Annual Bid Bond

SF 35, Annual Performance Bond

SF 273, Reinsurance Agreement for a Miller Act Performance Bond

SF 274, Reinsurance Agreement for a Miller Act Payment Bond

SF 275, Reinsurance Agreement in Favor of the United States

SF 1414, Consent of Surety

SF 1415, Consent of Surety and Increase of Penalty

SF 1416, Payment Bond for Other Than Construction Contracts