RD Instruction 1924-A
§ 1924.6(a) (Con.)
(1) Forms used. Form RD 1924-6, "Construction Contract," will be used for SFH construction. Other contract documents for more complex construction, acceptable to the loan approval official and containing the requirements of Subpart E of Part 1901 of this chapter, may be used provided they are customarily used in the area and protect the interest of the borrower and the Government with respect to compliance with items such as the drawings, specifications, payments for work, inspections, completion, nondiscrimination in construction work and acceptance of the work. If needed, the Office of the General Counsel (OGC) will be consulted. The United States (including Rural Development) will not become a party to a construction contract or incur any liability under it.
(2) Contract provisions. Contracts will have a listing of attachments and the provisions of the contract will include:
(i) The contract sum.
(ii) The dates for starting and completing the work.
(iii) The amount of liquidated damages to be charged.
(iv) The amount, method, and frequency of payment.
(v) Whether or not surety bonds will be provided.
(vi) The requirement that changes or additions must have prior written approval of Rural Development.
(3) Surety requirements.
(i) Unless an exception is granted in accordance with paragraph (a) (3) (iii) of this section or when interim financing will be used, surety that guarantees both payment and performance in the amount of the contract will be furnished when one or more of the following conditions exist:
(A) The contract exceeds the applicable Rural Development Single Family Housing area loan limit as per 7 CFR 3550.63. (Loan limits are available at the local Rural Development field office.) (Revised 06-21-06, PN 399.)
(5-12-87) SPECIAL PN
RD Instruction 1924-A
§ 1924.6(a)(3)(i) (Con.)
(B) The loan approval official determines that a surety bond appears advisable to protect the borrower against default of the contractor.
(C) The applicant requests a surety bond.
(D) The contract provides for partial payments in excess of the mount of 60 percent of the value of the work in place.
(E) The contract provides for partial payments for materials suitably stored on the site.
(ii) If surety bonds are required the construction contract must indicate that the contractor will furnish properly executed surety bonds prior to the start of any work. Exhibits F and G of this subpart as revised by OGC if necessary to comply with local or state statutory requirements will be used as the forms of payment bond and performance bond to be provided. Unless noncorporate surety is provided, the surety bonds may only be obtained from a corporate bonding company listed on the current Department of the Treasury Circular 570 (published annually in the Federal Register), as holding a certificate of authority as an acceptable surety on Federal bonds and as legally doing business in the State where the land is located. Noncorporate sureties are not recommended and the State Director will be responsible for determining the acceptability of the individual or individuals proposed as sureties on the bonds. The State Director must determine that an individual or individuals proposed as sureties must have cash or other liquid assets easily convertible to cash in an amount at least equal to 25 percent more than the contract amount in order to be acceptable. The individual(s) will pledge such liquid assets in an mount equal to the contract amount. Fees charged for noncorporate sureties may nor exceed fees charged by corporate sureties on bonds of equal amount and, in no case, may surety be provided by the applicant or any person or organization with an identity of interest in the applicant's operation. The United States (including Rural Development) will incur no liability related in any way to a performance or payment bond provided in connection with a
RD Instruction 1924-A
§ 1924.6(a)(3)(ii) (Con.)
construction contract. Rural Development will be named as co-obligee in the performance and payment bonds unless prohibited by state law.
(iii) When an experienced and reliable contractor cannot obtain payment and performance bonds meeting the surety requirements of paragraph (a) (3) (ii) of this section, the State Director may entertain a request from the applicant for an exception to the surety requirements. The applicant's request must specifically state why the proposed contractor is unable to obtain payment and performance bonds meeting the surety requirements, and why it is financially advantageous for the applicant to award the contract to the proposed contractor without the required bonds.
(Added 06-21-06, PN 399)
(5-12-87) SPECIAL PN
RD instruction 1924-A
§1924.6 (a) (3) (iii) (Con.)
If the applicant's request is reasonable and justified, and if the proposed contractor is reliable and experienced in the construction of projects of similar size, design, scope, and complexity, the State Director may grant an exception to the surety requirements for loans or grants within the State Director's approval authority and accept one or a combination of the following:
(A) An unconditional and irrevocable letter of credit issued by a lending institution which has been reviewed and approved by OGC. In such cases, the construction contract must indicate that the contractor will furnish a properly executed letter of credit from a lending institution acceptable to Rural Development prior to the start of any work. The letter of credit must retain in effect until the date of final acceptance of work by the owner and Rural Development. In addition, the letter of credit must stipulate that the lending institution, upon written notification by Rural Development of the contractor's failure to perform under the terms of the contract, will advance rounds up to the amount of the contract (including all Rural Development approved contract change orders) to satisfy all prior debts incurred by the contractor in performing the contract and all funds necessary to complete the work. Payments may be made to the contractor in accordance with paragraph (a) (12) (i) (C) of this section as if full surety bonds were being provided.
(B) If a letter of credit satisfying the conditions of paragraph (A) cannot be obtained, the State Director may accept a deposit in the amount of the contract, into an interest or non-interest bearing supervised bank account. In such cases, the construction contract must indicate that the contractor will furnish the required deposit prior to the start of any work and that the funds shall remain on deposit until final acceptance of work by the owner and Rural Development. Payments may be made to the contractor in accordance with paragraph (a) (12) (i) (C) of this section as if full surety bonds were being provided.
(C) When the provisions of paragraphs (a) (3) (iii) (A) or (B) of this section can be met except that a surety bond, a letter of credit, and/or deposits are not obtainable in full amount of the contract, the State Director may accept an amount less than the full amount of the contract provided all of the following conditions are met: