52.228-14
Irrevocable Letter of Credit
FAR 52.228-14 ensures that Irrevocable Letters of Credit used as security for government contracts are reliable, properly structured, and continuously valid to protect the government's interests.
Overview
FAR 52.228-14 establishes the requirements for using an Irrevocable Letter of Credit (ILC) as an acceptable form of security in lieu of bid, performance, or payment bonds in government contracts. The clause defines an ILC as a written, non-revocable commitment from a federally insured financial institution to pay the government upon demand. It specifies the conditions under which an ILC may be used, the required formats for the ILC and confirmation letters, and the standards for issuing and confirming financial institutions. The regulation also details expiration, renewal, and notification requirements to ensure continuous coverage for the government, and provides templates for the necessary documents.
Key Rules
- Definition and Use of ILC
- An ILC is a non-revocable commitment from a federally insured financial institution to pay the government upon demand, used as security for bid, performance, or payment bonds.
- Expiration and Renewal Requirements
- ILCs must have expiration dates that ensure coverage for the required period, with automatic renewal provisions unless proper advance notice is given.
- Issuing and Confirming Institutions
- Only federally insured, investment-grade financial institutions may issue or confirm ILCs, with additional requirements for large ILCs.
- Required Formats
- Specific formats for the ILC, confirmation letter, and sight draft must be used as provided in the clause.
- Notification and Documentation
- The contractor must provide credit ratings and ensure all documentation meets the clause’s requirements.
Responsibilities
- Contracting Officers: Ensure ILCs meet all regulatory requirements, verify issuing/confirming institutions, and use prescribed formats.
- Contractors: Obtain ILCs from qualified institutions, provide required documentation and credit ratings, and ensure timely renewals or replacements.
- Agencies: Oversee compliance and maintain proper documentation for financial security instruments.
Practical Implications
- This clause protects the government’s financial interests by ensuring reliable, secure payment mechanisms in lieu of traditional bonds. Contractors must carefully select financial institutions and manage ILC renewals to avoid lapses in coverage. Failure to comply can result in bid rejection or contract termination.