Federal Register / Vol. 62, No. 163 / Friday, August 22, 1997 / Rules and Regulations 44805

August 5, 1996 (61 FR 40714). No

comments were received in response to

the interim FAR rule. Therefore, the

interim FAR rule is being converted to

a final rule without change.

B. Regulatory Flexibility Act

The Department of Defense, the

General Services Administration, and

the National Aeronautics and Space

Administration certify that this final

rule will not 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., because this

rule merely amends the FAR to conform

to revisions to Department of Labor

(DoL) regulations reflecting repeal of the

‘‘manufacturer’’ and ‘‘regular dealer’’

requirements under the Walsh-Healey

Public Contracts Act. DoL has

determined that the revisions to its

regulations will not have a significant

economic impact on a substantial

number of small entities.

C. Paperwork Reduction Act

The Paperwork Reduction Act does

not apply because the changes to the

FAR do not impose recordkeeping or

information collection requirements, or

collections of information from offerors,

contractors, or members of the public

which require the approval of the Office

of Management and Budget under 44

U.S.C. 3501, et seq.

List of Subjects in 48 CFR Parts 1, 9, 14,

19, 22, 33, and 52

Government procurement.

Interim Rule Adopted as Final Without

Change

Accordingly, the interim rule

amending 48 CFR Parts 1, 9, 14, 19, 22,

33, and 52 which was published at 61

FR 67409, December 20, 1996, is

adopted as a final rule without change.

Authority: 40 U.S.C. 486(c); 10 U.S.C.

chapter 137; and 42 U.S.C. 2473(c).

Dated: August 7, 1997.

Edward C. Loeb,

Director, Federal Acquisition Policy Division.

[FR Doc. 97–21487 Filed 8–21–97; 8:45 am]

BILLING CODE 6820–EP–P

DEPARTMENT OF DEFENSE

GENERAL SERVICES

ADMINISTRATION

NATIONAL AERONAUTICS AND

SPACE ADMINISTRATION

48 CFR Parts 1, 28, and 52

[FAC 97–01; FAR Case 95–301; Item III]

RIN 9000–AG99

Federal Acquisition Regulation;

Irrevocable Letters of Credit and

Alternatives to Miller Act Bonds

AGENCIES: Department of Defense (DoD),

General Services Administration (GSA),

and National Aeronautics and Space

Administration (NASA).

ACTION: Interim rule adopted as final

with changes.

SUMMARY: The Civilian Agency

Acquisition Council and the Defense

Acquisition Regulations Council have

agreed to adopt as final, with changes,

the interim rule published as Item XVII

of Federal Acquisition Circular 90–39

on June 20, 1996. The rule amends the

Federal Acquisition Regulation (FAR) to

address the use of irrevocable letters of

credit in lieu of surety on Miller Act

bonds (OFPP Policy Letter 91–4) and

alternatives to Miller Act Bonds, as

required by Section 4101(b) of the

Federal Acquisition Streamlining Act of

1994 (FASA) (Pub. L. 103–355). This

regulatory action was not subject to

Office of Management and Budget

review under Executive Order 12866,

dated September 30, 1993, and is not a

major rule under 5 U.S.C. 804.

DATE: Effective October 21, 1997.

FOR FURTHER INFORMATION CONTACT: The

FAR Secretariat, Room 4035, GS

Building, Washington, DC 20405 (202)

501–4755 for information pertaining to

status or publication schedules. For

clarification of content, contact Mr. Jack

O’Neill, Procurement Analyst, at (202)

501–3856. Please cite FAC 97–01, FAR

case 95–301.

SUPPLEMENTARY INFORMATION:

A. Background

This final rule amends FAR Parts 1,

28, and 52 to provide for use of

Irrevocable Letters of Credit as

substitutes for corporate or individual

surety on Miller Act bonds, and

provides alternatives to Miller Act

payment bonds for construction

contracts valued at $25,000 to $100,000,

which are no longer subject to the Miller

Act, in accordance with Section

4104(b)(1) of FASA. An interim rule

with request for comment was

published in the Federal Register on

June 20, 1996 (61 FR 31651). Comments

were received from seven respondents.

The final rule includes the following

changes in response to public

comments:

• Update of the references to reflect

the current version of the Uniform

Customs and Practice for Documentary

Credits.

• Amendment of the definition of

Irrevocable Letter of Credit (ILC).

Deletion of application of the term

‘‘unconditional’’ to ILCs.

• Incorporation of requirements for a

specific expiration date for ILCs used in

lieu of surety on performance or

payment bonds, with automatic

extension for one-year periods, until the

contracting officer notifies the financial

institution that the Government is

waiving the right to payment.

• Limitation of the requirement for

confirmation of ILCs over $5 million to

those issued by financial institutions

that had letter of credit business of less

than $25 million in the past year.

• Incorporation of an explicit

requirement for credit rating service to

be as specified in Office of Federal

Procurement Policy Pamphlet No. 7.

• Amendment of the clause at

52.228–13, Alternative Payment

Protections, to specify the amount of

payment protection as 50 percent of the

contract price, and to require payment

protection within a certain number of

days after contract award.

The Councils did not adopt a

comment which recommended a change

in the expiration date for ILCs from 60

to 75 days after the close of the bid

acceptance period, as the comment

appeared to be based on a

misinterpretation of the rule. The

recommended 75-day expiration period

was based on the need for 60 days to

cover the bid acceptance period, plus 10

days to cover the time necessary for

submission of payment and

performance bonds, and 5 additional

days to cover mailing time. However, as

written, the rule provides for 60 days in

addition to the number of days required

for the bid acceptance period; i.e., if the

bid acceptance period is 60 days, the

rule requires the ILC to cover a total of

120 days before expiration.

B. Regulatory Flexibility Act

The final rule is expected to have a

significant positive economic impact on

a substantial number of small entities

within the meaning of the Regulatory

Flexibility Act, 5 U.S.C. 601 et seq.,

because the rule provides alternatives to

Miller Act bonds for construction

contracts between $25,000 and

$100,000, which may be beneficial to
44806 Federal Register / Vol. 62, No. 163 / Friday, August 22, 1997 / Rules and Regulations

construction contractors. A Final

Regulatory Flexibility Analysis (FRFA)

has, therefore, been prepared and will

be provided to the Chief Counsel for

Advocacy of the Small Business

Administration. A copy of the FRFA

may be obtained from the FAR

Secretariat. The analysis is summarized

as follows:

This rule will apply to all businesses, large

and small, which contract with the

Government for construction. The objective

is to make it easier for small construction

contractors to provide payment protection,

by providing alternatives for construction

contracts valued between $25,000 and

$100,000. In addition, the rule permits the

use of Irrevocable Letters of Credit as security

for Miller Act bonds, in lieu of corporate or

individual sureties. The rule imposes no new

recordkeeping or reporting requirements, and

provides alternatives to Miller Act payment

bonds for construction contracts which do

not exceed $100,000.

C. Paperwork Reduction Act

This rule will reduce the information

collection requirements which the

Office of Management and Budget

(OMB) previously approved under 44

U.S.C. 3501, et seq. (OMB Control No.

9000–0045). The rule will reduce the

number of respondents and responses

by identifying and correcting an overlap

in reporting of performance and

payment and bid bonds.

List of Subjects in 48 CFR Parts 1, 28,

and 52

Government procurement.

Dated: August 7, 1997.

Edward C. Loeb,

Director, Federal Acquisition Policy Division.

Accordingly, the interim rule

amending 48 CFR Parts 28 and 52 which

was published at 61 FR 31651, June 20,

1996, is adopted as final with changes

as set forth below:

1. The authority citation for 48 CFR

Parts 1, 28, and 52 continues to read as

follows:

Authority: 40 U.S.C. 486(c); 10 U.S.C.

chapter 137; and 42 U.S.C. 2473(c).

PART 1—FEDERAL ACQUISITION

REGULATIONS SYSTEM

2. The table in section 1.106 is

amended by removing the entries for

28.106–1(b) and 52.228–3; revising the

entry for 52.228–2; and adding entries

in numerical order to read as follows:

1.106 OMB Approval under the Paperwork

Reduction Act.

FAR segment OMB control No.

* * * * *

28.106–

1(e).

9000–0001

28.106–

1(n).

9000–0119

* * * * *

52.228–2 9000–0045 and 9000–0119

52.228–13 9000–0045

52.228–15 9000–0045

52.228–16 9000–0045 and 9000–0119

* * * * *

PART 28—BONDS AND INSURANCE

3. Section 28.000 is revised to read as

follows:

28.000 Scope of part.

This part prescribes requirements for

obtaining financial protection against

losses under sealed bid and negotiated

contracts. It covers bid guarantees,

bonds, alternative payment protections,

security for bonds, and insurance. The

terms ‘‘bid’’ and ‘‘bidders’’ include

‘‘proposal’’ and ‘‘offerors.’’

4. Section 28.001 is amended by

revising the definitions for ‘‘Irrevocable

letter of credit’’ and ‘‘Penal sum’’ to read

as follows:

28.001 Definitions.

* * * * *

Irrevocable letter of credit (ILC) means

a written commitment by a federally

insured financial institution to pay all

or part of a stated amount of money

until the expiration date of the letter,

upon presentation by the Government

(the beneficiary) of a written demand

therefor. Neither the financial

institution nor the offeror/contractor can

revoke or condition the letter of credit.

Penal sum or penal amount means the

amount of money specified in a bond (or

a percentage of the bid price in a bid

bond) as the maximum payment for

which the surety is obligated or the

amount of security required to be

pledged to the Government in lieu of a

corporate or individual surety for the

bond.

* * * * *

Subpart 28.1—Bonds and Other

Financial Protections

5. The heading of Subpart 28.1 is

revised to read as set forth above.

6. Section 28.100 is revised to read as

follows:

28.100 Scope of subpart.

This subpart prescribes requirements

and procedures for the use of bonds,

alternative payment protections, and all

types of bid guarantees.

7. Section 28.102–2 is amended by

revising the introductory text of

paragraph (b)(1) and paragraphs (b)(2),

(c)(1), and (c)(2) to read as follows:

28.102–2 Amount required.

* * * * *

(b) * * * (1) The penal amount of

payment bonds or the amount of

alternative payment protection shall

equal—

* * * * *

(2) If the original contract price is $5

million or less, the Government may

require additional protection if the

contract price is increased.

(i) The penal amount of the total

protection as revised shall meet the

requirement of paragraph (b)(1) of this

subsection.

(ii) The Government shall secure the

required additional protection by

directing the contractor to increase the

penal sum of the existing bond or to

obtain an additional bond, or to furnish

additional alternative payment

protection.

* * * * *

(c) * * * (1) When determining the

penal sum of bonds or the amount of

alternative payment protection for

requirements contracts, the contracting

officer shall consider the contract price

to be the price payable for the estimated

quantity.

(2) When determining the penal sum

of bonds or the amount of alternative

payment protection for indefinitequantity contracts, the contracting

officer shall consider the contract price

to be the price payable for the specified

minimum quantity. When the minimum

quantity is exceeded, paragraphs (a)(2)

and (b)(2) of this subsection apply.

* * * * *

8. Section 28.102–3 is amended by

revising the section heading and the last

sentence of paragraph (b) to read as

follows:

28.102–3 Contract clauses.

* * * * *

(b) * * * Complete the clause by

specifying the payment protections

selected (see 28.102–1(b)(1)) and the

deadline for submission.

9. Section 28.106–3 is revised to read

as follows:

28.106–3 Additional bond and security.

(a) When additional bond coverage is

required and is secured in whole or in

part by the original surety or sureties,

agencies shall use Standard Form 1415,
Federal Register / Vol. 62, No. 163 / Friday, August 22, 1997 / Rules and Regulations 44807

Consent of Surety and Increase of

Penalty. Standard Form 1415 is

authorized for local reproduction, and a

copy of the form is furnished for this

purpose in part 53 of the looseleaf

edition of the FAR.

(b) When additional bond coverage is

required and is secured in whole or in

part by a new surety or by one of the

alternatives described in 28.204 in lieu

of corporate or individual surety,

agencies shall use Standard Form 25,

Performance Bond; Standard Form

1418, Performance Bond for Other Than

Construction Contracts; Standard Form

25–A, Payment Bond; or Standard Form

1416, Payment Bond for Other Than

Construction Contracts.

10. Section 28.106–8 is revised to read

as follows:

28.106–8 Payment to subcontractors or

suppliers.

The contracting officer will only

authorize payment to subcontractors or

suppliers from an ILC (or any other cash

equivalent security) upon a judicial

determination of the rights of the

parties, a signed notarized statement by

the contractor that the payment is due

and owed, or a signed agreement

between the parties as to amount due

and owed.

Subpart 28.2—Sureties and Other

Security for Bonds

11. The heading of Subpart 28.2 is

revised as set forth above.

12. Section 28.200 is revised to read

as follows:

28.200 Scope of subpart.

This subpart prescribes procedures for

the use of sureties and other security to

protect the Government from financial

losses.

28.201 Requirements for security.

13. Section 28.201 is amended by

revising the section heading as set forth

above, and in paragraph (b) by inserting

the word ‘‘other’’ after ‘‘or’’ the first

time it appears.

14. Section 28.204 is amended in

paragraph (a) by revising the second

sentence to read as follows:

28.204 Alternatives in lieu of corporate or

individual sureties.

(a) * * * When any of those types of

security are deposited, a statement shall

be incorporated in the bond form

pledging the security in lieu of

execution of the bond form by corporate

or individual sureties. * * *

* * * * *

15. Section 28.204–3 is amended by

revising paragraphs (b), (c), (f)

introductory text, (f)(2) introductory

text, (f)(2)(ii)(B), (g) introductory text,

(g)(1) and (h) to read as follows:

28.204–3 Irrevocable letter of credit (ILC).

* * * * *

(b) The ILC shall be irrevocable,

require presentation of no document

other than a written demand and the

ILC (and letter of confirmation, if any),

expire only as provided in paragraph (f)

of this subsection, and be issued/

confirmed by an acceptable federally

insured financial institution as provided

in paragraph (g) of this subsection.

(c) To draw on the ILC, the

contracting officer shall use the sight

draft set forth in the clause at 52.228–

14, and present it with the ILC

(including letter of confirmation, if any)

to the issuing financial institution or the

confirming financial institution (if any).

* * * * *

(f) The period for which financial

security is required shall be as follows:

* * * * *

(2) If used as an alternative to

corporate or individual sureties as

security for a performance or payment

bond, the offeror/contractor may submit

an ILC with an initial expiration date

estimated to cover the entire period for

which financial security is required or

an ILC with an initial expiration date

that is a minimum period of one year

from the date of issuance. The ILC shall

provide that, unless the issuer provides

the beneficiary written notice of nonrenewal at least 60 days in advance of

the current expiration date, the ILC is

automatically extended without

amendment for one year from the

expiration date, or any future expiration

date, until the period of required

coverage is completed and the

contracting officer provides the

financial institution with a written

statement waiving the right to payment.

The period of required coverage shall

be:

* * * * *

(ii) * * *

(B) For performance bonds only, until

completion of any warranty period.

(g) Only federally insured financial

institutions rated investment grade or

higher shall issue or confirm the ILC.

Unless the financial institution issuing

the ILC had letter of credit business of

at least $25 million in the past year,

ILCs over $5 million must be confirmed

by another acceptable financial

institution that had letter of credit

business of at least $25 million in the

past year.

(1) The offeror/contractor shall

provide the contracting officer a credit

rating from a recognized commercial

rating service as specified in Office of

Federal Procurement Policy Pamphlet

No. 7 (see 28.204–3(h)) that indicates

the financial institution has the required

rating(s) as of the date of issuance of the

ILC.

* * * * *

(h)(1) Additional information on

credit rating services and investment

grade ratings is contained within Office

of Federal Procurement Policy Pamphlet

No. 7, Use of Irrevocable Letters of

Credit. This pamphlet may be obtained

by calling the Office of Management and

Budget’s publications office at (202)

395–7332.

(2) A copy of the Uniform Customs

and Practice (UCP) for Documentary

Credits, 1993 Revision, International

Chamber of Commerce Publication No.

500, is available from: ICC Publishing,

Inc., 156 Fifth Avenue, New York NY,

10010, Telephone: (212) 206–1150,

Telefax: (212) 633–6025, E-mail:

iccpub@interport.net

PART 52—SOLICITATION PROVISIONS

AND CONTRACT CLAUSES

16. Section 52.228–2 is amended by

revising the introductory text, the clause

date, and paragraph (d) to read as

follows:

52.228–2 Additional Bond Security.

As prescribed in 28.106–4(a), insert

the following clause:

Additional Bond Security (Oct 1997)

* * * * *

(d) An irrevocable letter of credit (ILC)

used as security will expire before the end of

the period of required security. If the

Contractor does not furnish an acceptable

extension or replacement ILC, or other

acceptable substitute, at least 30 days before

an ILC’s scheduled expiration, the

Contracting officer has the right to

immediately draw on the ILC.

(End of clause)

17. Section 52.228–13 is amended by

revising the clause date and paragraphs

(b), (c) and (f) to read as follows:

52.228–13 Alternative Payment

Protections.

* * * * *

Alternative Payment Protections (Oct 1997)

* * * * *

(b) The amount of the payment protection

shall be 50 percent of the contract price.

(c) The submission of the payment

protection is required within llll days

of contract award.

* * * * *

(f) When a tripartite escrow agreement is

used, the Contractor shall utilize only

suppliers of labor and material that signed

the escrow agreement.

(End of clause)

18. Section 52.228–14 is amended by

revising:
44808 Federal Register / Vol. 62, No. 163 / Friday, August 22, 1997 / Rules and Regulations

(a) The clause date and paragraphs (a),

(b), (c) introductory text, (c)(2)

introductory text, (c)(2)(ii)(B), and (d);

(b) Following paragraph (e) in the

‘‘Irrevocable Letter of Credit’’,

paragraphs 1, 2, 4, and 6; and

(c) Following paragraph (f) in the ILC

confirmation, paragraphs 3, 4(a), and 6.

The revised sections read as follows:

52.228–14 Irrevocable Letter of Credit.

* * * * *

Irrevocable Letter of Credit (Oct 1997)

(a) ‘‘Irrevocable letter of credit’’ (ILC), as

used in this clause, means a written

commitment by a federally insured financial

institution to pay all or part of a stated

amount of money, until the expiration date

of the letter, upon presentation by the

Government (the beneficiary) of a written

demand therefor. Neither the financial

institution nor the offeror/Contractor can

revoke or condition the letter of credit.

(b) If the offeror intends to use an ILC in

lieu of a bid bond, or to secure other types

of bonds such as performance and payment

bonds, the letter of credit and letter of

confirmation formats in paragraphs (e) and (f)

of this clause shall be used.

(c) The letter of credit shall be irrevocable,

shall require presentation of no document

other than a written demand and the ILC

(including confirming letter, if any), shall be

issued/confirmed by an acceptable federally

insured financial institution as provided in

paragraph (d) of this clause, and—

* * * * *

(2) If used as an alternative to corporate or

individual sureties as security for a

performance or payment bond, the offeror/

Contractor may submit an ILC with an initial

expiration date estimated to cover the entire

period for which financial security is

required or may submit an ILC with an initial

expiration date that is a minimum period of

one year from the date of issuance. The ILC

shall provide that, unless the issuer provides

the beneficiary written notice of non-renewal

at least 60 days in advance of the current

expiration date, the ILC is automatically

extended without amendment for one year

from the expiration date, or any future

expiration date, until the period of required

coverage is completed and the Contracting

Officer provides the financial institution with

a written statement waiving the right to

payment. The period of required coverage

shall be:

* * * * *

(ii) * * *

(B) For performance bonds only, until

completion of any warranty period.

(d) Only federally insured financial

institutions rated investment grade or higher

shall issue or confirm the ILC. The offeror/

Contractor shall provide the Contracting

Officer a credit rating that indicates the

financial institution has the required rating(s)

as of the date of issuance of the ILC. Unless

the financial institution issuing the ILC had

letter of credit business of at least $25 million

in the past year, ILCs over $5 million must

be confirmed by another acceptable financial

institution that had letter of credit business

of at least $25 million in the past year.

(e) * * *

1. We hereby establish this irrevocable and

transferable Letter of Credit in your favor for

one or more drawings up to United States

$llll. This Letter of Credit is payable at

[issuing financial institution’s and, if any,

confirming financial institution’s] office at

[issuing financial institution’s address and, if

any, confirming financial institution’s

address] and expires with our close of

business on llll, or any automatically

extended expiration date.

2. We hereby undertake to honor your or

the transferee’s sight draft(s) drawn on the

issuing or, if any, the confirming financial

institution, for all or any part of this credit

if presented with this Letter of Credit and

confirmation, if any, at the office specified in

paragraph 1 of this Letter of Credit on or

before the expiration date or any

automatically extended expiration date.

* * * * *

4. This Letter of Credit is transferable.

Transfers and assignments of proceeds are to

be effected without charge to either the

beneficiary or the transferee/assignee of

proceeds. Such transfer or assignment shall

be only at the written direction of the

Government (the beneficiary) in a form

satisfactory to the issuing financial

institution and the confirming financial

institution, if any.

* * * * *

6. If this credit expires during an

interruption of business of this financial

institution as described in Article 17 of the

UCP, the financial institution specifically

agrees to effect payment if this credit is

drawn against within 30 days after the

resumption of our business.

(f) * * *

3. We hereby undertake to honor sight

draft(s) drawn under and presented with the

Letter of Credit and this Confirmation at our

offices as specified herein.

4. * * *

(a) At least 60 days prior to any such

expiration date, we shall notify the

Contracting Officer, or the transferee and the

issuing financial institution, by registered

mail or other receipted means of delivery,

that we elect not to consider this

confirmation extended for any such

additional period; or

* * * * *

6. If this confirmation expires during an

interruption of business of this financial

institution as described in Article 17 of the

UCP, we specifically agree to effect payment

if this credit is drawn against within 30 days

after the resumption of our business.

* * * * *

(End of clause)

[FR Doc. 97–21488 Filed 8–21–97; 8:45 am]

BILLING CODE 6820–EP–P

DEPARTMENT OF DEFENSE

GENERAL SERVICES

ADMINISTRATION

NATIONAL AERONAUTICS AND

SPACE ADMINISTRATION

48 CFR Parts 1 and 31

[FAC 97–01; FAR Case 96–010; Item IV]

RIN 9000–AH41

Federal Acquisition Regulation;

Automatic Data Processing Equipment

Leasing Costs

AGENCIES: Department of Defense (DoD),

General Services Administration (GSA),

and National Aeronautics and Space

Administration (NASA).

ACTION: Interim rule adopted as final.

SUMMARY: The Civilian Agency

Acquisition Council and the Defense

Acquisition Regulations Council have

agreed to convert the interim rule

published as Item I of Federal

Acquisition Circular 90–44 on

December 31, 1996, to a final rule

without change. The rule amends the

Federal Acquisition Regulation (FAR) to

remove the cost principle on automatic

data processing equipment (ADPE)

leasing costs. This regulatory action was

not subject to Office of Management and

Budget review under Executive Order

12866, dated September 30, 1993, and is

not a major rule under 5 U.S.C. 804.

DATES: Effective October 21, 1997.

FOR FURTHER INFORMATION CONTACT: The

FAR Secretariat, Room 4035, GS

Building, Washington, DC 20405 (202)

501–4755 for information pertaining to

status or publication schedules. For

clarification of content, contact Mr.

Jeremy Olson, Procurement Analyst, at

(202) 501–3221. Please cite FAC 97–01,

FAR case 96–010.

SUPPLEMENTARY INFORMATION:

A. Background

An interim rule was published on

December 31, 1996 (61 FR 69287). The

interim rule deleted the ADPE

definition at FAR 31.001, the cost

principle at FAR 31.205–2, Automatic

data processing equipment leasing costs,

and references to the term ADPE found

elsewhere in FAR Part 31. The interim

rule is converted to a final rule without

change.

Public comments were received from

one source. The comments were

considered in developing the final rule.

B. Regulatory Flexibility Act

The Department of Defense, the

General Services Administration, and