FAR 31.205-4—Bonding costs.
Plain-English Summary
FAR 31.205-4 addresses when bonding costs are allowable as contract costs under the cost principles. It explains what bonding costs are, including bid, performance, payment, advance payment, infringement, and fidelity bonds, and distinguishes between bonds required by the Government under a contract and bonds a contractor obtains as part of its general business operations. The section exists to tell contractors and contracting officers which bonding expenses may be charged to Government contracts and under what conditions, so that only reasonable, properly supported costs are reimbursed. In practice, this means the allowability of a bonding cost depends first on whether the bond is contract-required or business-practice-required, and then on whether the cost is reasonable and consistent with sound business practice. The rule helps prevent improper charging of general business insurance-type expenses while still allowing legitimate protection costs tied to contract performance or normal commercial operations.
Key Rules
Bonding costs defined
Bonding costs are expenses incurred to obtain assurance against financial loss to the Government or others caused by the contractor’s act or default, or to protect the contractor in similar circumstances. The section specifically includes bid, performance, payment, advance payment, infringement, and fidelity bonds.
Contract-required bonds are allowable
If the contract requires bonding, the associated cost is allowable. This covers bonds that are expressly required by the contract terms and are necessary to satisfy the Government’s stated assurance requirement.
Business-practice bonds may be allowable
Bonds required by the contractor in the general conduct of its business are also allowable, but only if they reflect sound business practice. The contractor must be able to show that obtaining the bond is a normal and prudent business decision.
Reasonableness is required
Even when a bond is allowable, the rates and premiums must be reasonable under the circumstances. Excessive premiums, unnecessary coverage, or unusual terms may make all or part of the cost unallowable or subject to adjustment.
Allowability depends on purpose and support
The key distinction is whether the bond is tied to a contract requirement or to general business operations. Contractors should maintain documentation showing why the bond was obtained, what it covered, and how the premium was determined.
Responsibilities
Contracting Officer
Identify when the contract requires bonding and ensure the requirement is clearly stated in the contract terms. Review claimed bonding costs for allowability and reasonableness when evaluating cost submissions or indirect cost proposals.
Contractor
Obtain required bonds when the contract or business needs call for them, and charge only allowable, reasonable costs. Maintain records showing the bond type, purpose, premium, and basis for treating the cost as a contract expense.
Agency
Apply the cost principle consistently when negotiating, administering, or auditing contracts. Ensure bonding costs are not reimbursed unless they fit within the rule and are supported by adequate documentation.
Practical Implications
Contract-required bonds are usually straightforwardly allowable, but the contractor still needs proof of the premium and the contract clause or requirement that triggered it.
Business-practice bonds can be allowable, but contractors should be ready to explain why the bond is standard for their operations and why the premium is reasonable.
A common pitfall is charging broad insurance or bonding expenses to a contract without showing the bond was required or customary in the business.
Another risk is overpaying for coverage or buying unnecessary bond amounts; only reasonable premiums are allowable.
Contractors and contracting officers should verify that the bond type matches the purpose claimed, especially for bid, performance, payment, advance payment, infringement, and fidelity bonds.
Official Regulatory Text
(a) Bonding costs arise when the Government requires assurance against financial loss to itself or others by reason of the act or default of the contractor. They arise also in instances where the contractor requires similar assurance. Included are such bonds as bid, performance, payment, advance payment, infringement, and fidelity bonds. (b) Costs of bonding required pursuant to the terms of the contract are allowable. (c) Costs of bonding required by the contractor in the general conduct of its business are allowable to the extent that such bonding is in accordance with sound business practice and the rates and premiums are reasonable under the circumstances.