When required, bid bonds are an essential aspect to a proper bid. Under FAR 52.228-1, they secure the liability of a surety to the government by providing funds to cover the excess costs of awarding to the next eligible bidder if the successful bidder defaults by failing to fulfill these obligations.
There is a standard form for bid bonds. Though it’s not required, using the standard form is probably the safest bet to avoid possible rejection of a bid, as one contractor learned the hard way.
In a recent decision, Pac. Dredge & Constr., LLC, B-418900 (Sept. 18, 2020), the GAO denied a bid protest by a small business dredging operation out of California, Pacific Dredge and Construction, LLC, finding that the agency reasonably rejected as defective a bid bond which limited the liability of the corporate surety with respect to excess reprocurement costs in the event of contractor default. This decision was issued despite evidence of prior dealings between the parties wherein the agency had accepted bid bonds on the same form.
The Department of the Army, United States Army Corps of Engineers issued a solicitation in May of 2020 for bids to do some annual maintenance dredging in California, which required bidders to include pricing for items, as well as a bid guarantee. The solicitation noted that failure to furnish a bid guarantee in the proper form and amount could result in rejection of a bid pursuant to FAR 52.228-1.
In its bid, Pacific did not submit a completed FAR standard form (SF) 24 bid bond, opting instead to submit its bid guarantee on a widely-used standard commercial form published by the American Institute of Architects. Unfortunately, the contracting officer for the Corps determined a default clause in Pacific’s bid bond was defective, because it did not “provide the full range of protections” as mandated by FAR 52.228-1, which requires a surety to cover all excess reprocurement costs in the event of a default.
Pacific’s bond provided that in the event of the contractor’s default “[t]he surety pays to the Owner [the Corps] the difference, not to exceed the amount of this Bond, between the amount specified in said bid and such larger amount for which the Owner [the Corps] may in good faith contract with another party to perform the work covered by said bid[.]” Because the commercial form used by Pacific was not clear as to whether Pacific would cover all excess reprocurement costs in the event of default, the contracting officer rejected the bid bond as nonresponsive. Without a valid bid bond, Pacific was ineligible for award.
Pacific filed a GAO bid protest challenging its exclusion.
At GAO, Pacific attempted to argue it had ensured compliance with the FAR provisions by including a catchall “savings clause” that would delete any bond provision conflicting with statutory and other legal requirements. Pacific had also attempted to make this argument with the Corps as well, but was unsuccessful with both the agency and the GAO.
The GAO cited a prior decision–G2G, LLC, B-416502, Sept. 27, 2018–which took issue with a default clause’s significant departure from the rights and obligations specifically set forth in FAR provision 52.228-1(e). G2G also contained a savings clause with the same substantive language as the one Pacific put forth, which was ultimately too ambiguous with respect to the liability of the surety to satisfy the requirements of FAR 52.228-1.
Pacific also attempted to argue the agency’s rejection of its bid was improper because the agency had previously accepted the same commercial bid bond form, resulting in an established course of dealing between the parties. The Corps denied the existence of any established course of dealing, but also noted that, regardless, a bid’s responsiveness is determined solely from the face of the bid, and any established course of dealing did not ultimately affect the contracting officer’s rejection of Pacific’s bid as nonresponsive. The GAO sided with the Corps, based on the importance of bid bonds.
The GAO’s summary of the significance of bid bonds is worth repeating here, as a defective bid bond in this case resulted in rejection of an otherwise proper bid, where Pacific was the apparent low-bidder, poised to possibly receive a valuable government contract. The GAO noted, “[b]id bonds are a form of guarantee, which ensures a bidder will not withdraw its bid within the period specified for acceptance and, if required, will execute a written contract and furnish required performance and payment bonds.” GAO also explained, “[w]hen required by a solicitation, a bid bond or other bid guarantee is a material part of the bid with which there must be compliance at the time of bid opening.” “When a bidder submits a defective bid bond—or when uncertainty exists at the time of bid opening that the bidder has furnished a legally binding bond—the bid itself is rendered nonresponsive and generally requires rejection of the bid.”
Although GAO noted that use of a commercial bid bond form, as here, rather than an SF 24 bid bond form is not per se objectionable, the GAO still agreed with the Corps regarding Pacific’s bid bond form. The real problem with Pacific’s bid bond was the default clause, as the GAO revealed, “[o]ur Office has consistently regarded language similar to the default clause in Pacific’s bid bond as limiting the surety’s liability to the difference between the bid amount and the replacement contract amount” and that “such limitation differs significantly from the requirements of FAR provision 52.228-1, which permits recovery of all excess reprocurement costs, including, for example, the administrative costs of reprocurement of the costs of in-house government performance.”
The GAO noted later in its decision that “a past course of dealing between a bidder and the procuring agency cannot affect the responsiveness of a bid.” It further explained that an agency’s previous acceptance of defective bid bonds from Pacific does not prohibit the Corps from later invoking the legal requirements of competitive bidding.
Though unpersuaded by Pacific’s arguments related to course of dealing, the GAO clarified how bid bonds will be evaluated, explaining, “[i]n general, a bid’s responsiveness must be determined solely from the face of the bid and materials submitted with the bid.” GAO also noted, “if the agency cannot determine definitively from the face of the bid documents that the surety would be bound, the bond is defective and must be rejected.” “The test applied in determining the responsiveness of a bid is whether the bid as submitted is an unequivocal offer to perform the exact thing called for in the IFB; thus, if a bid is ambiguous with regard to a material IFB provision, such as a bonding requirement, it is nonresponsive.”
The GAO ultimately denied the protest. It is an unfortunate result for Pacific Dredge, one that signals a warning to bidders– if you don’t submit a valid bid bond, you may find yourself stuck in the mud, a dredgeful position.
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