On November 5, 2018, the Federal Circuit held in a precedential decision that bonding requirements in FAR 52.228-15, “Performance and Payment Bonds—Construction,” were read into all construction contracts by operation of law at the time of award, pursuant to the Christian doctrine.  FAR 52.228-15 requires an offeror in any construction contract valued over $150,000 to furnish performance and payment bonds:

Performance and Payment Bonds—Construction (OCT 2010)
…
(b) Amount of required bonds. Unless the resulting contract price is $150,000 or less, the successful offeror shall furnish performance and payment bonds to the Contracting Officer as follows:

(1) Performance bonds (Standard Form 25). The penal amount of performance bonds at the time of contract award shall be 100 percent of the original contract price.
(2) Payment Bonds (Standard Form 25-A). The penal amount of payment bonds at the time of contract award shall be 100 percent of the original contract price.

The three-judge panel in K-Con, Inc. v. Secretary of the Army, No. 2017-2254, found that government contractors have a legal duty to provide performance and payment bonds for all awarded construction contracts. This duty is triggered upon award of a construction contract, even if the agency has omitted the relevant provisions and requirements, placing responsibility on the contractor to be aware of this obligation. The panel also found that the contracts at issue in K-Con, Inc. were for construction, even though the agency had designated the procurement as one for commercial items and used the GSA eBuy system via Standard Form 1449, “Solicitation/Contract/Order for Commercial Items.”

Facts

In K-Con, Inc., the government awarded K-Con task orders for the design and construction of a laundry facility and the construction of a communications equipment shelter (pursuant to two separate solicitations) at Camp Edwards, Massachusetts. Neither solicitation included express bonding requirements or FAR 52.228-15, the standard bond requirement clause included in government construction contracts.

The Army informed K-Con, Inc. it would not issue a notice to proceed until K-Con, Inc. provided payment and performance bonds, which K-Con, Inc. did nearly two years later. K-Con, Inc. submitted a request for equitable adjustment (REA) under each contract to recover for increased costs over the two-year period. The Contracting Officer (CO) denied both REAs after determining that the contracts were for construction rather than commercial-items, and that the bond requirements set forth in FAR 52.228-15 were mandatory, because they were incorporated into both contracts at the time of award under the Christian doctrine. The ASBCA agreed with the CO on appeal, and subsequently denied K-Con, Inc.’s Motion for Reconsideration.

Analysis

On appeal to the Federal Circuit, K-Con, Inc. offered two arguments: (i) the contracts were commercial-item contracts, therefore did not mandate FAR 52.228-15 performance and payment bonds because that clause applies only to construction contracts; and (ii) that even if the contracts were correctly determined to be construction contracts, FAR 52.228-15 was not included or incorporated, therefore K-Con, Inc. was not required to provide bonding.

Regarding the first argument, the Federal Circuit found the contracts to be for construction. The Court held that the contracts were “patently ambiguous” because the agency used both commercial item solicitation forms and construction-related provisions, which rendered them facially inconsistent.  Further, the Court found that K-Con, Inc. was on notice of these inconsistencies because they were patent rather than latent, and therefore had a duty to seek clarification as to whether the contracts were for commercial items upon their discovery. Because K-Con, Inc. did not inquire about the contract type when it discovered the patent ambiguities, it was prohibited from arguing that the contracts were for commercial items on appeal.

Regarding K-Con, Inc.’s second argument, the Court found the bonding requirements of FAR 52.228-15 to be read in to all government construction contracts pursuant to the Christian doctrine. For a court to incorporate a clause into a government contract under the Christian doctrine, it generally must find (i) that the clause is mandatory; and (ii) that it expresses a significant or deeply ingrained strand of public procurement policy.

The Court found the bonds to be required by law, specifically 40 U.S.C. §§ 3131–34 (formerly known as the Miller Act), which requires that before any government construction contract valued at over $100,000 is awarded, that the contractor must furnish the government performance and payment bonds.  40 U.S.C. § 3131(b). This statute is implemented at FAR 28.102-1 (the regulatory threshold of $150,000 represents an adjustment for inflation), and FAR 28.102-3(a), which specifies that FAR 52.228-15 is to be included in all government solicitations and contracts for construction. The Federal Circuit found that the obligatory language of these provisions made the bonding requirements mandatory under statute, satisfying the first prong of the Christian doctrine.

The Federal Circuit then found that the long-standing nature and lengthy legislative history, along with the remedial and protective purposes of the performance and payment bonds rendered them “a significant or deeply ingrained strand of public procurement policy.” Additionally, the Court noted that government property cannot be subject to subcontractors’ and suppliers’ mechanic’s liens, therefore payment bonds offer an alternative remedy to government contract subcontractors and suppliers to ensure payment from a prime contractor. The Court also noted the importance of performance bonds because they ensure contract completion at no further cost to the government should the contractor fail.

Conclusion

This case creates a clear need for all contractors, regardless of whether they are awarded a construction contract, to inquire early on in the procurement process as to what type of contract they are bidding on if any potential ambiguities are present. We now also know that performance and payment bonds under FAR 52.228-15 are required and must be read in to all construction contracts, even if the provisions are not originally included or incorporated into the contract. Therefore, contractors will need to price their performance and payment bonds into their proposal, even if the requirement is not included in the RFP.

While this decision offers clarity on some issues, others remain unresolved. The Federal Circuit shied away from the fact that the Army had sought to purchase construction through a commercial-item contract vehicle, and included both commercial item and construction contract provisions within the solicitations and contracts. The Army was then able to rely on the contracts’ patent ambiguities and shift blame to K-Con, Inc. for failing to clarify contract type, allowing the Court to avoid determining which contract type was actually utilized. This demonstrates just how much risk is on the contractor’s shoulders when faced with contract ambiguities.