Subcontractor's Corner: Payments, Payment Bonds & Public-Sector Projects
March 2021 Updated
Getting paid in full and timely, for work completed and accepted, is the fundamental "material" transaction and expectation of every Contractor. Past due or denied payments are serious problems. For private-sector projects, subcontractors can file a Mechanic’s Lien as a means to induce payment if necessary. However, contractors are barred from placing a lien on public-sector property due to the "sovereign immunity" of the government, and instead must file a Claim against the Payment Bond. Subcontractors should always confirm a payment bond is provided and get copy of the bond up front when a Subcontract is offered. Always get copy of the payment bond BEFORE executing a Subcontract!
To lien or not to lien? Since contractors are barred from placing a lien on public property, on federal projects, subcontractors and material suppliers can file claim under "The Miller Act”. Many States have similar “Little Miller Act’ laws on the books. Under the Miller Act, the Prime Contractor's Surety is required to provide a payment bonds (P&P) on federal projects awarded above the “Simplified Acquisition Threshold” (currently $150K). A payment bond protects subcontractors and suppliers in the event of non-payment. A performance bond protects the Owner in the event of default by the Prime Contractor.
Unfortunately, on federal projects awarded below the Simplified Acquisition Threshold (i.e., <$150K) bonds are generally not required, meaning, there is no payment bond guarantee and no Miller Act protection. On these smaller projects, subcontractors are at higher risk in the event of non-payment, and must usually file a lawsuit against the Prime Contractor, which is costly, and may cost more than the unpaid amount at issue.
Typically, on any Prime / Subcontractor payment dispute, the government will not get involved. It does not have privity of contract with Subcontractors, even though it may have paid the Prime Contractor in full, and has benefited from the subcontract work completed.
However, when a Prime Contractor has not made timely payment, and is ignoring a Subcontractor's payment demands, contacting the government Contracting Officer is allowable and may help induce payment from the Prime. There is support within federal regulations allowing a Contracting Officer (KO) to investigate non-payment to subcontractors, specifically, FAR 32.112-1, Subcontractor assertions of nonpayment. Nonetheless, whether the KO acts or not is solely at her discretion.
It Pays to be Smart! To reduce the risk of having no bond protection on small projects, or for any project regardless of size, Subcontractors should know the "chain of custody" for payment and the date the Prime Contractor actually receives payment from the Owner. When presented with a Subcontract Agreement, Subcontractors should negotiate that the Prime Contractor:
Provide the name, phone number and Email address of the Contracting Officer, and the contact information of the complete "chain of custody" approval process, including the General Contractor. [an Email with this info should suffice].
Insert in the "Payment" clause of the Subcontract Agreement that the Prime will provide immediate written notice (e.g., via Email) of the dates it receives payments from the government (owner). [Add this or similar language to the Payment clause of the Subcontract]
Insert that the Prime will provide written notice should the government / owner make any payment reductions affecting your Subcontract payments, or for any delay in payment. [Add this or similar language to the Payment clause of the Subcontract]
Do this as a condition of executing a Subcontract as the reasons for including these notice requirements are self-evident. For instance, Subcontract Agreements typically require the Prime Contractor pay the Subcontractor within say, 7 or 10 days of its receipt of payment from the Owner. However, how can a Subcontractor ensure the Prime Contractor is in compliance with these payment terms if the subcontractor doesn't know when the Prime received payment from the Owner? Moreover, Subcontractors are critical "stakeholders" on the Project and have every right to obtain the contact information of the Contracting Officer and of the payment "chain of custody" process. This is critical information that may be needed later, so make sure to get it up front.
If a progress payment by a Prime to its subcontractor is delayed or unpaid, the subcontractor should immediately notify the Prime in writing (make certain to provide all written notifications in the time-frame and manner the Subcontract requires--be it certified mail, regular mail or Email). Should the Prime be non-responsive, or otherwise unduly delay your receipt of payment, then engage the Contracting Officer to investigate. In fact, these simple steps should be applied on any federal project, regardless of size. Find out if and when the government paid the Prime, and insist that the subcontractor's portion of that payment is provided. Again, although the government has no "privity" of contract with subcontractors, it does have some regulatory responsibility to ensure payments are made to subcontractors.
In addition, the government requires Prime Contractors execute Release / Waivers before receiving any payment. Those forms usually contain specific language that the Prime Contractor certifies it has paid its subcontractors and met other payment obligations, and also requires the Prime list any subcontractors not paid or underpaid and the reasons why. It is a potentially dangerous game for any Prime executing these Release Waivers to fraudulently misrepresent the actual payment and payment status of its subcontractors. It runs the risk of violating the "False Claims Act", which can result in serious consequences to the Prime Contractor.
As the foregoing suggests, Subcontractors would be wise to monitor the Prime Contractor's actions with respect to payments, and the best means of doing that is to insert additional conditions of payment terms into their Subcontracts.
The Miller Act. To file a Miller Act claim, subcontractors need to know who the Surety is, where to send the Claim, and the terms of the bond. This information is included in the Payment Bond. Although first-tier subcontractors do not need to notify the Prime of their intent to file a Miller Act Claim, lower tier subcontractors and material suppliers must send written notice to the contractor posting the bond, of their intent to file under the Miller Act.
The Miller Act has strict notice and deadline requirements, and getting the bond up front will allow timely filing of a Claim, without having to engage in a potentially protracted effort with the GC later on. Standard Miller Act filing requirements stipulate that (1) you must wait 90 days from when you provided the last Contract labor (does not include “warranty” work) to the Project, and no later than one year from that date. This provides a 9-month window of opportunity to Claim under the Miller Act. This time constraint is strictly enforced!
Where's My Payment? Getting paid timely and in full for services rendered is what contractors are in business to do. Lack of payment or untimely payments can put small contractors out of business. Understanding the protections Subcontractors have on their projects, being proactive, assertive and smart in their approach, can reduce those risks.
Always get copy of the Payment Bond with each Subcontract Agreement.
Add language into the Subcontract that the Prime will notify you in writing within 48 hours of the date of its receipt of payment from the Owner.
Add terms to the Subcontract regarding Back-charges stating that the Prime provide written notice of any potential Back-charge incident and provide at least a 48-hour written notice to cure. Otherwise, state that Back-charges are void if prior written cure notice was not provided.
Never sign the Release / Waiver forms the Prime requires you sign for each progress payment and change modification to be executed, without first reviewing the "release language" with your attorney. You need to understand what you are releasing BEFORE you sign, and you must insert your EXCEPTIONS and RESERVATION OF RIGHTS TO CLAIM into the Release / Waiver--or you will assuredly lose those critical rights.
There are other "best practices" to help ensure subcontractors are paid on time, in full, and not indiscriminately back-charged at the end of a Project as some not so ethical GC's will do. Never delay to act on any delay in payment. Stand your ground!
If you have any questions, need help with getting paid, or help preparing a claim under the Miller Act, please feel free to contact me at email@example.com.
Alan Paquette, Principal Consultant
Construction Analytix, LLC
July 11, 2019
Disclaimer: The information contained in this article is for general informational purposes only and reflects the opinions of the author. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice, or as advice applicable to specific situations.