Fidelity Bond

A fidelity bond is a financial guarantee that protects the federal government or a prime contractor from theft, embezzlement, or other dishonest acts committed by a contractor's employees who have access to government funds, equipment, or sensitive materials.

What is a Fidelity Bond?

A fidelity bond (also called an employee dishonesty bond or crime bond) is a form of surety or insurance product that compensates the bonded party for losses resulting from fraudulent or dishonest acts by the covered employees. Unlike performance and payment bonds (which are required by law for construction contracts), fidelity bonds are required by specific contract terms when contractors handle government funds, manage government-owned property, or provide financial services.

When fidelity bonds are required:

• Financial management and disbursing contracts where contractor employees handle government funds.
• Contract guard services where employees have physical access to government facilities.
• Payroll processing contracts handling government employee pay.
• Custody and maintenance contracts for high-value government property.
• Banking and investment contracts where contractors invest government funds.

FAR 28.203 authorizes contracting officers to require fidelity bonds for contracts involving contractor employees handling money or securities. The bond amount is typically set at a level commensurate with the maximum value of funds or property to which the covered employees will have access.

Types of fidelity bonds:

• Commercial blanket bond: Covers all employees without naming individuals, with a single limit applying to any single act regardless of number of employees involved.
• Position schedule bond: Covers employees by position title rather than name, useful when covered roles have high turnover.
• Name schedule bond: Covers specifically named employees, appropriate for small numbers of high-access individuals.

Why Fidelity Bonds matter for government contractors

Financial services contractors, guard services firms, and companies managing government property should anticipate fidelity bond requirements as a standard cost of doing business. Bond premiums are allowable costs under FAR 31.205-4 (insurance costs), making them recoverable on cost-type contracts. Fixed-price contractors must price fidelity bond costs into their proposals.

Example

A company wins a contract to manage a federal agency's financial assistance payment processing, disbursing approximately $50 million in grant payments annually. The contract requires a fidelity bond covering all employees with access to payment systems, with coverage of at least $5 million per occurrence. The company obtains a commercial blanket bond from a Treasury-listed surety for $5 million, pays the annual premium, and provides the bond certificate to the contracting officer before beginning performance.

Frequently Asked Questions

Is a fidelity bond the same as errors and omissions insurance?

No. A fidelity bond covers intentional dishonest acts (theft, embezzlement, fraud) by employees. Errors and omissions (E&O) insurance covers unintentional mistakes or negligence in the performance of professional services. The key distinction is intent: fidelity bonds cover deliberate wrongdoing; E&O covers honest errors.

Are fidelity bond costs recoverable on government contracts?

Yes. FAR 31.205-4 makes insurance costs, including bonding costs, allowable when required by the contract or by applicable law. Fidelity bond premiums on cost-type contracts are recoverable as indirect or direct costs depending on whether they relate to a specific contract or the contractor's general business operations.

What does a fidelity bond not cover?

Fidelity bonds do not cover losses from non-dishonest employee error (covered by E&O), losses from third-party theft (covered by property insurance), or losses from contractor management decisions (not insurable). The bond specifically covers the dishonest acts of the named or covered employees.

Who typically issues fidelity bonds?

Fidelity bonds are issued by insurance companies and surety companies, often the same companies that issue performance and payment bonds. For fidelity bonds on contracts with the federal government, the issuer must be admitted to do business in the state where the work is performed and should meet the financial strength requirements appropriate to the bond amount required.