2011 FEDCON Summit

1. 2011 FEDCON SUMMIT
WILMINGTON, NC
LEGAL ISSUES
BONDING -
THE MILLER ACT
William H. Gammon, Nelson Mullins, LLP
bill.gammon@nelsonmullins.com
GlenLake One, Suite 200
4140 Parklake Avenue
Raleigh, NC 27612
October 19, 2011
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2. MILLER ACT
Background
The payment of subcontractors and suppliers on construction projects has always
involved special remedies. For example, all states have provisions allowing unpaid
subcontractors, subsubcontractors and suppliers to file liens on the Owner’s property, if the
subcontractors have not received payment. (Here in North Carolina, see Ch. 44A of the North
Carolina General Statutes.)
However, on public contracts, public policy has long concluded that an unpaid
subcontractor should not be able to place a lien on public property. The reasoning is that the
property belongs not to a single private person or entity, but to the public at large.
As a result, Congress enacted the Miller Act (40 U.S.C. 3131, et seq. (formerly 40
U.S.C. § 270, et seq.)) to provide a different type of protection for unpaid subcontractors.
That remedy is the requirement for general contractors to obtain a payment bond from a
surety, thereby providing the subcontractor and suppliers to have an action against the surety
for the nonpayment and thereby not have to rely on the financial strength of the general
contractor.
Projects of less than $25,000 have no bonding requirements. Projects greater than
$25,000, but less than $100,000, allow for bonds to be supplied by an independent surety or
some alternative. Projects greater than $100,000 require that the bonds be obtained from an
independent surety.
Other Bonds
The Miller Act not only requires the provision of payment bonds by the contractor on a
federal construction project to guarantee payments to subcontractors and suppliers. It also
requires bidder on public projects to supply bid bonds, and requires the successful bidders to
provide performance bonds.
Bid Bonds
Bid bonds are required so that there is security that the winning contractor will proceed
to contract after the solicitation opening and the exposure of proposals or bids. Bid bonds must
be provided with the bid or response to the solicitation in the amount of 20% of the
bid/proposal or $3,000,000, which ever is less.
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3. Thus, following bid or proposal opening, and thereby the exposure of all bids/proposals
to the fellow competitors, the winning bidder/proposer has a financial incentive to “go to
contract.”
Performance Bonds
Performance bonds are required so that there is an outside guarantor who will guarantee
through the issuance of a performance bond, that the awarded contractor will complete the
project. Performance bonds are at 100% of the contract price.
Payment Bonds
As noted above, payment bonds secure that payment will be made to subcontractors and
suppliers. When one thinks of the Miller Act, it is this requirement for payment bonds that
most people consider to be the focus of the Act.
Every person (and that includes laborers) that furnished labor or materials on a federal
construction project, and that has not been paid within 90 days of the last furnishing of such
labor or materials, may bring an action on the bond to secure such payment.
Who Can Bring An Action?
The Miller Act limits actions against payment bonds to first and second tier
subcontractors. Stated differently, only subcontractors and those who contract with
subcontractors (or subsubcontractors) and suppliers to the general contractor can bring an
action on the payment bond.
A third tier subcontractor (or subsubsubcontractor), or anyone below that level has no
such rights to bring an action on the payment bond. In somewhat of a strange quirk, a second
tier supplier (or subsupplier to a supplier) likewise has no rights against the payment bond.
(See the chart at the end of the materials setting forth who can/cannot bring payment bond
actions.)
When Must A Claim Be Brought?
A subcontractor or supplier can bring a claim against the payment bond at any time
after 90 days has elapsed since the last labor or materials were furnished by the subcontractor/
supplier, but before one year has elapsed.
The same timing for filing is true of second tier subcontractors or suppliers to
subcontractors, except that the second tier must give written notice to the general contractor
within 90 days of last furnishing labor or materials that the subsubcontractor or subsupplier to
the subcontractor has not been paid. The purpose for the written notice is actually quite simple
-– the general contractor knows who it has paid, but the general contractor often would not
know who its subcontractor has paid – therefore, notice to the general is appropriate.
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5. Where Are Miller Act Actions Brought?
Any action brought under the Miller Act must be filed in the United States District
Court in the district where the project is located. In other words, if a Miller Act action on a
project at either Camp Lejeune or Ft. Bragg was instituted, it must be filed in the United States
District Court for the Eastern District of North Carolina. On the other hand, a Miller Act
action on a federal project, at say, Charlotte, would have to be brought in the United States
District Court for the Western District of North Carolina.
Subcontractors Entitled To Obtain Copy of Bond?
The Contracting Officer is required by FAR 32.112-2 to provide a copy of the payment
bond to any subcontractor or supplier, if requested with an Affidavit that the subcontractor
supplied labor and/or materials on the project and was not paid within 90 days.
There is a similar requirement for contractors to furnish such information, if requested.
FAR 28.106 and FAR 52.228-12, Prospective Subcontractor Requests for Bonds (OCT 1995).
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