FAR 52.228-14—Irrevocable Letter of Credit.
Plain-English Summary
FAR 52.228-14, Irrevocable Letter of Credit, sets the government’s rules for using an irrevocable letter of credit (ILC) instead of a bid bond or as security in place of corporate or individual sureties for performance and payment bonds. It defines what an ILC is, requires that it be truly irrevocable and payable on written demand, and prescribes the exact formats for the issuing bank’s letter and any confirming letter. The clause also establishes when an ILC may be used as a bid guarantee, how long it must remain in effect, and how automatic annual renewal works unless the bank gives timely non-renewal notice. It further limits who may issue or confirm an ILC by requiring federally insured, investment-grade financial institutions, and adds special confirmation requirements for larger ILCs. In practice, this clause protects the Government by ensuring that the financial backing behind a bid or bond substitute is reliable, collectible, and available for the full period of required coverage. Contractors must coordinate closely with their financial institution and the contracting officer to make sure the ILC language, expiration dates, renewal terms, and credit ratings all satisfy the clause before award or bond substitution is accepted.
Key Rules
ILC must be irrevocable
An ILC is a written commitment by a federally insured financial institution to pay a stated amount upon the Government’s written demand. Neither the bank nor the contractor may revoke it or add conditions that limit the Government’s right to draw.
Use prescribed formats
If the ILC is used instead of a bid bond or to secure performance/payment bonds, the clause requires the formats in paragraphs (e) and (f). The Government expects the letter and any confirmation to track the clause language closely, not a custom bank form that changes the required terms.
Bid guarantee expiration rule
When used as a bid guarantee, the ILC must expire no earlier than 60 days after the close of the bid acceptance period. This ensures the Government has enough time to evaluate bids and protect itself during the acceptance window.
Bond security coverage period
When used in place of corporate or individual sureties for performance or payment bonds, the ILC must cover the full required security period. It may be issued for the estimated full period or for at least one year with automatic one-year extensions unless the bank gives 60 days’ written non-renewal notice.
Coverage continues until release
The ILC stays in force until the required coverage period ends and the contracting officer gives the financial institution a written waiver of the right to payment. For covered construction contracts, the required period can extend through final payment, warranty periods, and, for payment bonds, claim resolution periods.
Only qualified institutions may issue
Only federally insured financial institutions rated investment grade by a commercial rating service may issue or confirm the ILC. The contractor must provide the contracting officer evidence of the institution’s current rating as of the issuance date.
Large ILCs may need confirmation
If the issuing institution did not have at least $25 million in letter of credit business in the prior year, ILCs over $5 million must be confirmed by another acceptable federally insured institution that also meets the $25 million threshold. This adds an extra layer of credit support for larger obligations.
NRSRO ratings are the benchmark
The clause points contractors to SEC-registered Nationally Recognized Statistical Rating Organizations (NRSROs) for current ratings. The Government relies on these ratings to verify that the issuing or confirming institution meets the required credit standard.
Transferability and assignment
The prescribed ILC format states that the letter is transferable and that transfers or assignments of proceeds must be handled without charge and only at the Government’s written direction in a form acceptable to the issuing institution. This preserves Government control over who can draw on the credit.
Responsibilities
Contracting Officer
Determine whether an ILC is acceptable in the procurement context, verify that the form and terms comply with the clause, confirm the institution’s rating and any required confirmation, monitor expiration and renewal issues, and issue the written waiver of the right to payment when the required coverage period is complete.
Offeror/Contractor
Obtain an ILC from a qualifying federally insured financial institution, ensure the letter uses the required FAR format, provide evidence of the institution’s current rating, arrange any required confirmation, and keep the ILC in force for the full required coverage period through renewal or replacement as needed.
Issuing Financial Institution
Issue an irrevocable, unconditional letter of credit payable on the Government’s written demand, use the required format, maintain the ILC through its expiration and any automatic extensions, and provide timely written notice if it elects not to renew.
Confirming Financial Institution
If confirmation is required, provide the additional credit support in the prescribed manner and meet the same qualification standards applicable to acceptable federally insured institutions.
Government Beneficiary/Agency
Present a proper written demand when drawing on the ILC, maintain the ILC and any confirmation in the contract file, and coordinate with the contracting officer on waiver, renewal, or enforcement actions.
Practical Implications
Contractors cannot treat an ILC like a flexible bank comfort letter; it must be a true, unconditional payment instrument that the Government can draw on with minimal documentation.
The biggest compliance risk is expiration or non-renewal. If the bank gives the required 60-day non-renewal notice and the contractor does not replace the security in time, the contractor may be out of compliance and exposed to default or award problems.
For larger ILCs, the confirmation requirement can add time and cost, so contractors should start bank coordination early rather than waiting until just before award or bond submission.
The required coverage period can last well beyond final completion, especially for performance bonds with warranty periods and payment bonds with post-final-payment claim windows. Contractors should plan for long-tail banking fees and renewal administration.
A bank’s rating and letter-of-credit business volume matter. A financially strong bank is not enough if it does not meet the specific rating or business-volume thresholds in the clause.
Official Regulatory Text
As prescribed in 28.204-4 , insert the following clause: Irrevocable Letter of Credit (Nov 2014) (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- (1) If used as a bid guarantee, the ILC shall expire no earlier than 60 days after the close of the bid acceptance period; (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: (i) For contracts subject to 40 U.S.C. chapter 31 , subchapter III, Bonds, the later of- (A) Oneyear following the expected date of final payment; (B) For performance bonds only, until completion of any warranty period; or (C) For payment bonds only, until resolution of all claims filed against the payment bond during the one-year period following final payment. (ii) For contracts not subject to 40 U.S.C. chapter 31 , subchapter III, Bonds, the later of- (A) 90 days following final payment; or (B) For performance bonds only, until completion of any warranty period. (d) (1) Only federally insured financial institutions rated investment grade by a commercial rating service shall issue or confirm the ILC. (2) 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. (3) The Offeror/Contractor shall provide the Contracting Officer a credit rating that indicates the financial institutions have the required credit rating as of the date of issuance of the ILC. (4) The current rating for a financial institution is available through any of the following rating services registered with the U.S. Securities and Exchange Commission (SEC) as a Nationally Recognized Statistical Rating Organization (NRSRO). NRSRO’s can be located at the website http://www.sec.gov/answers/nrsro.htm maintained by the SEC. (e) The following format shall be used by the issuing financial institution to create an ILC: _________________________________________________ [ Issuing Financial Institution’s Letterhead orNameandAddress ] Issue Date __________ Irrevocable Letter of Credit No. _______________________ Account party’s name _______________________________ Account party’s address ______________________________ For Solicitation No. _________________ ( for reference only ) To: [ U.S. Government agency ] [ U.S. Government agency’s address ] 1. We hereby establish this irrevocable and transferable Letter of Credit in your favor for one or more drawings up to United States $____. 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 _______, 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. 3. [ This paragraph is omitted if used as a bid guarantee, and subsequent paragraphs are renumbered .] It is a condition of this Letter of Credit that it is deemed to be automatically extended without amendment for oneyear from the expiration date hereof, or any future expiration date, unless at least 60 days prior to any expiration date, we notify you or the transferee by registered mail, or other receipted means of delivery, that we elect not to consider this Letter of Credit renewed for any such additional period. At the time we notify you, we also agree to notify the account party (and confirming financial institution, if any) by the same means of delivery. 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. 5. This Letter of Credit is subject to the Uniform Customs and Practice (UCP) for Documentary Credits, International Chamber of Commerce Publication No. _____________________ (Insert version in effect at the time of ILC issuance, e.g., "Publication 600, 2006 edition") and to the extent not inconsistent therewith, to the laws of _____________________ [State of confirming financial institution, if any, otherwise State of issuing financial institution]. 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. Sincerely, _______________________________ [ Issuing financial institution ] (f) The following format shall be used by the financial institution to confirm an ILC: [Confirming Financial Institution’s Letterhead or Name and Address ] ______________________________________________ (Date) __________________ Our Letter of Credit Advice Number ____________________ Beneficiary: _________________ [ U.S. Government agency ] Issuing Financial Institution: __________________________ Issuing Financial Institution’s LC No.: __________________ Gentlemen: 1. We hereby confirm the above indicated Letter of Credit, the original of which is attached, issued by __________ [ name of issuing financial institution ] for drawings of up to United States dollars /U.S. $ and expiring with our close of business on _____________ [ the expiration date ], or any automatically extended expiration date. 2. Draft(s) drawn under the Letter of Credit and this Confirmation are payable at our office located at _________________. 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. [ This paragraph is omitted if used as a bid guarantee, and subsequent paragraphs are renumbered .] It is a condition of this confirmation that it be deemed automatically extended without amendment for oneyear from the expiration date hereof, or any automatically extended expiration date, unless: (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 (b) The issuing financial institution shall have exercised its right to notify you or the transferee, the account party, and ourselves, of its election not to extend the expiration date of the Letter of Credit. 5. This confirmation is subject to the Uniform Customs and Practice (UCP) for Documentary Credits, International Chamber of Commerce Publication No. _____________________ (Insert version in effect at the time of ILC issuance, e.g., "Publication 600, 2006 edition") and to the extent not inconsistent therewith, to the laws of _____________________ [State of confirming financial institution]. 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. Sincerely, _______________________________ [ Confirming financial institution ] (g) The following format shall be used by the Contracting Officer for a sight draft to draw on the Letter of Credit: Sight Draft _______________________________ [ City, State ] (Date) _____________________________ [ Name and address of financial institution ] Pay to the order of ______________ [ Beneficiary Agency ] ___________ the sum of United States $. This draft is drawn under Irrevocable Letter of Credit No. _______________________. _______________________________ [ Beneficiary Agency ] _______________________________ [ By ] (End of clause)