At some point contractors on Public Works projects have probably asked why a Performance Bond and Payment Bond are required for their work. They may have even heard that it is because of The Miller Act. But what is The Miller Act and why does it affect surety? It may surprise many contractors to learn that The Miller Act was created for their benefit. Like a lot of legislation, The Miller Act is complex and full of legal language. We will try to simplify it into a useful document for contractors and other interested parties.
Long before The Miller Act existed, it was recognized that contractors needed protection against non-payment. In fact, a mechanic’s lien like system was used in Europe as early as the late 1700s. Thomas Jefferson is widely given credit for developing mechanic’s liens in the United States. Over time all states have developed mechanic’s lien laws that protect contractors and material suppliers from non-payment on Private Projects. The problem for contractors and suppliers is that you cannot file a mechanic’s lien on Public Projects.
The Heard Act
In response to subcontractors and suppliers not being able to collect their debts or file mechanic’s liens on Federal property, Congress passed the Heard Act in 1894. The Heard Act was a step in the right direction by requiring a single bond to cover the performance and payment obligations of Prime Contractors on Federal projects. However, the law had some flaws and did not do enough to protect the payment right of contractors and suppliers. It was repealed with the passage of The Miller Act.
The Miller Act is Created
In 1935 Congress passed The Miller Act. The Miller Act applies to Federal contracts and provides a method for protecting Subcontractors and Material Suppliers on those projects by requiring Prime Contractors involved in the construction, alteration, or repair of Federal buildings to furnish both a Performance Bond and a separate Payment Bond for the project. Failure by a contractor to pay suppliers and subcontractors gives such suppliers and subcontractors the right to sue the contractor in U.S. District Court in the name of the United States.
Who Can Make a Surety Bond Claim under The Miller Act?
First Tier Subcontractors and Material Suppliers can file a surety bond claim under The Miller Act. These are subcontractors and suppliers who have a direct contract with the Prime Contractor. Additionally, Second Tier Subcontractors and Material Suppliers can also file a claim under The Miller Act. These are parties that have a direct contract with a First Tier Subcontractor. The chart below illustrates this.
Architects, Engineers, Surveyors, and other professionals may be covered as well so long as they were performing site visits to the project.
Who Cannot Make a Surety Bond Claim under The Miller Act?
The Prime Contractor is prevented from making a bond claim on their own bond. Additionally, all Third Tier Subcontractors and below are prevented from making a bond claim along with Third Tier Material Suppliers. Suppliers of suppliers are also not covered. For example, if a Prime Contractor purchased pipe from a supplier who was not the manufacturer of the pipe, the manufacturer is not protected under The Miller Act.
What Projects Fall Under the Miller Act?
Generally, construction or improvements to any property owned by The U.S. Federal Government are covered. However, this is not always the case. In recent years, the Government has been leasing Federal property to private owners. Courts has generally ruled that if a Federal property is leased to a private owner, and that private owner makes improvements with private funds, The Miller Act is not applicable. It is always a good practice to ask for a copy of the performance bond and payment bond if you are in doubt.
When are Payment and Performance Bonds Required Under the Miller Act?
Federal contracts of $150,000 and larger require that the Prime Contractor post a Performance Bond and separate Payment Bond. Many people incorrectly believe this amount is $100,000 but it was increased in 2010 for inflation. Payment security is also required when the contract exceeds $30,000. For contracts between $35,000 and $150,000 a contractor can use a payment bond, irrevocable letter of credit, certificate of deposit or even an escrow agreement if allowed by the contracting officer. Even if allowed, interested should parties should consider the pros and cons of different payment security which can be found here.
What are The Amounts of the Performance Bonds and Payment Bonds?
The Miller Act is implemented through the Federal Acquisitions Regulations (FAR). The Miller Act requires a performance bond in an amount that the contracting officer regards as adequate for the protection of the Federal government. The FAR establishes that amount as 100% of the contract price as the rule. Any exception to this rule requires must go through the contracting officer who would need to determine why lesser protection is adequate to protect the government. This would be an unusual circumstance.
The Miller Act also requires a separate payment bond. The FAR establishes an amount of 100% of the contract price as the rule. Any exception to this rule would also have to go through the contracting officer and that person would have to determine why less protection was adequate. Again, this would be rare. The amount of the payment bond cannot be less than the amount of the performance bond.
What Does a Performance Bond and Payment Bond Cover Under the Miller Act?
The Payment Bond covers labor costs and material cost that were used in the project. The labor and material section under the Miller Act are very broad. It certainly covers traditional construction material that goes into the project such as lumber, concrete, drywall, ect. However, it can also cover other items rental costs, tools, gasoline, and tires consumed on the project and delay costs so long as they were not caused by the claimant.
The Performance Bond protects the Federal government and therefore the taxpayers. It guarantees that the project will be completed at the contract price bid to the government. If the Prime Contractor cannot complete this obligation, the surety bond company will step in. You can read more about Performance Bond claims here. The Performance Bond under The Miller Act also specifically guarantees the payment of taxes owed to the government for the project.
Bond Claim Filing Requirements Under the Miller Act
First contractors and material suppliers need to determine if they are a first or second tier under the bond as this affects filing requirements. First tier contractors and suppliers have up to one year from the last date they performed labor or supplied material to the project. However, they must wait at least 90 days before bringing civil action. The thought process is that it takes time for payments to funnel through the system and it would be premature to make a claim before 90 days. The Prime Contractor should, in theory, know when it has not paid a First-Tier subcontractor or supplier. The Miller Act does not have any preliminary notice requirements for First-Tier subcontractors and suppliers. However, in practice I would strongly encourage these parties to send verifiable written notice to the Prime Contractor. Ideally this notice should be sent as soon as the subcontractor or supplier expects that the Prime Contractor is not paying, even before the 90-day period has expired.
On the other hand, Second-Tier contractors and suppliers only have 90 days to file a claim from the last time they performed labor or supplied material to the project. They must make written notice to the Prime Contractor within that 90-day period or the claim will be denied. This notice requirement needs to specify the amount of the claim, name the party to whom the labor or material was furnished and be delivered to the Prime Contractor by a means that is verifiable from a third party such as certified mail. I would strongly recommend making sure this notice is Delivered and in the Prime Contractor’s possession before the 90 days has expired. Some courts have held that this is a requirement.
The thought process for the 90 requirement here is that the Prime Contractor does not have a direct relationship with Second-Tier contractors and suppliers. Therefore, they need timely notice to rectify the payment situation with their First-Tier subcontractors and suppliers. Prime Contractors can seek indemnity or hold future payments on First-Tier subcontractors and suppliers so that they do not have to pay twice. Prime Contractors should make sure their contracts give them this leverage.
Contractor Rights to Obtain a Copy of the Performance and Payment Bonds
To file a claim on the Prime Contractor’s bond, you need to know the bond company. Unfortunately, in these situations, the Prime Contractor rarely volunteers a copy of their bond. Fortunately, under The Miller Act, every party that supplies labor or material to the project has AN ABSOLUTE RIGHT to get a copy of the bond regardless of what the Prime Contractor may say. Specifically, section (40 U.S.C. 3133(a)) states:
(a) Right of Person Furnishing Labor or Material to Copy of Bond.— The department secretary or agency head of the contracting agency shall furnish a certified copy of a payment bond and the contract for which it was given to any person applying for a copy who submits an affidavit that the person has supplied labor or material for work described in the contract and payment for the work has not been made or that the person is being sued on the bond. The copy is prima facie evidence of the contents, execution, and delivery of the original. Applicants shall pay any fees the department secretary or agency head of the contracting agency fixes to cover the cost of preparing the certified copy.
Over the years, I have seen significant delays trying to get a copy of the bonds after there is trouble. Prime Contractors often refuse to provide copies at that point. Although required, it is not always timely or easy to get a copy from a Federal entity either. A much better practice is to request a copy of the bonds before signing a contract on a Miller Act project. All parties tend to be more accommodating at that point. Also, it is a good idea to always verify the bond. Do not assume that contracting officers are doing this. Most are not and do not always know what to look for. Performance bonds and payment bonds on Miller Act projects must be listed on the 570 Circular. It takes very little time and effort to get a copy of the bond and verify it upfront. Then, if a claim situation arises, you already have the information on file.
Contractors and suppliers should read their progress documents carefully so that they do not waive their rights to performance and payment bond protection. Under the Miller Act, it is against public policy to waive payment rights before the project starts or before work is performed. However, parties are entitled to reach a settlement over disputed amounts. Therefore, payment rights can be waived but only after work has been performed. As always, each party should be very aware of the documents they are signing.
Little Miller Acts
To this point, this discussion has been on The Federal Miller Act. This is often referred to as, “The Big Miller Act.” Since going into effect, every state has passed their own version of the Miller Act. These are often referred to as, “Little Miller Acts.” Although there are similarities, each state has their own individual requirements which are far to big for the scope of this article.
Contingent Payment Clauses
Contingent payment clauses such as Pay-If-Paid are important to all contractors and suppliers of every level. These words can literally make or break any party. You can read more about this topic here. For Federal projects under The Miller Act, courts have routinely held that these provisions are not a defense to non-payment by Prime Contractors or their surety bond companies. However, case law can constantly change. The trend for Little Miller Acts and state policies has been to allow contingent payment clauses as a defense on state projects. Contractors should carefully review these with a skilled attorney before signing a contract.
The passage of The Miller Act was a great thing for subcontractors, suppliers, and taxpayers on a Federal level. It provides a requirement for performance bonds and payment bonds to ensure that projects are completed, and bills are paid without additional costs to taxpayers. It should be a great incentive for contractors and material suppliers to do Federal work by making sure their payment rights are protected. It is important to understand the act and what is covered. At MG Surety Bonds, we are surety experts and can help contractors navigate the complexity of public work on both a Federal and State level. Contact us anytime.