Miller act and rights of subcontractors


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2011 FEDCON Summit

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Miller act and rights of subcontractors

  1. 1. 2011 FEDCON SUMMIT WILMINGTON, NC LEGAL ISSUES BONDING - THE MILLER ACTWilliam H. Gammon, Nelson Mullins, LLPbill.gammon@nelsonmullins.comGlenLake One, Suite 2004140 Parklake AvenueRaleigh, NC 27612 October 19, 2011~#4811-6182-8871 v.1~
  2. 2. MILLER ACTBackground The payment of subcontractors and suppliers on construction projects has alwaysinvolved special remedies. For example, all states have provisions allowing unpaidsubcontractors, subsubcontractors and suppliers to file liens on the Owner’s property, if thesubcontractors have not received payment. (Here in North Carolina, see Ch. 44A of the NorthCarolina General Statutes.) However, on public contracts, public policy has long concluded that an unpaidsubcontractor should not be able to place a lien on public property. The reasoning is that theproperty 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 40U.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 asurety, thereby providing the subcontractor and suppliers to have an action against the suretyfor the nonpayment and thereby not have to rely on the financial strength of the generalcontractor. 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 orsome alternative. Projects greater than $100,000 require that the bonds be obtained from anindependent surety.Other Bonds The Miller Act not only requires the provision of payment bonds by the contractor on afederal construction project to guarantee payments to subcontractors and suppliers. It alsorequires bidder on public projects to supply bid bonds, and requires the successful bidders toprovide performance bonds. Bid Bonds Bid bonds are required so that there is security that the winning contractor will proceedto contract after the solicitation opening and the exposure of proposals or bids. Bid bonds mustbe provided with the bid or response to the solicitation in the amount of 20% of thebid/proposal or $3,000,000, which ever is less.~#4811-6182-8871 v.1~
  3. 3. Thus, following bid or proposal opening, and thereby the exposure of all bids/proposalsto the fellow competitors, the winning bidder/proposer has a financial incentive to “go tocontract.” Performance Bonds Performance bonds are required so that there is an outside guarantor who will guaranteethrough the issuance of a performance bond, that the awarded contractor will complete theproject. Performance bonds are at 100% of the contract price. Payment Bonds As noted above, payment bonds secure that payment will be made to subcontractors andsuppliers. When one thinks of the Miller Act, it is this requirement for payment bonds thatmost people consider to be the focus of the Act. Every person (and that includes laborers) that furnished labor or materials on a federalconstruction project, and that has not been paid within 90 days of the last furnishing of suchlabor 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 tiersubcontractors. Stated differently, only subcontractors and those who contract withsubcontractors (or subsubcontractors) and suppliers to the general contractor can bring anaction on the payment bond. A third tier subcontractor (or subsubsubcontractor), or anyone below that level has nosuch rights to bring an action on the payment bond. In somewhat of a strange quirk, a secondtier 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 bondactions.)When Must A Claim Be Brought? A subcontractor or supplier can bring a claim against the payment bond at any timeafter 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 tosubcontractors, except that the second tier must give written notice to the general contractorwithin 90 days of last furnishing labor or materials that the subsubcontractor or subsupplier tothe 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 notknow who its subcontractor has paid – therefore, notice to the general is appropriate.~#4811-6182-8871 v.1~
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  5. 5. Where Are Miller Act Actions Brought? Any action brought under the Miller Act must be filed in the United States DistrictCourt in the district where the project is located. In other words, if a Miller Act action on aproject at either Camp Lejeune or Ft. Bragg was instituted, it must be filed in the United StatesDistrict Court for the Eastern District of North Carolina. On the other hand, a Miller Actaction on a federal project, at say, Charlotte, would have to be brought in the United StatesDistrict 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 paymentbond to any subcontractor or supplier, if requested with an Affidavit that the subcontractorsupplied 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).~#4811-6182-8871 v.1~