Will the fidelity market experience the one-two punch of lower premium volume and increased claims activity in what has traditionally been a low-risk, and growing, category? While concerned about fidelity bond customer demand in the near term..
The Miller Act: Understanding Requirements and Recoverable Costs
Author: Eric Weisbrot
Posted On: 03-17-2020
Many regulations exist in the construction industry, most designed to protect contractors, businesses, and the vendors and suppliers used to complete projects. One long-standing regulation is the Miller Act – federal law enacted in 1935 that still holds weight today. Under the Miller Act, certain federal construction projects require specific bonds to be in place in an effort to provide peace of mind to subcontractors and materials suppliers on the job.
Although the Miller Act has an almost century-old history in the construction industry, contractors, surety companies, and others involved in federal projects do not fully understand the scope of the law. Particularly for surety professionals, it is crucial to understand the requirements under the Miller Act as well as who is protected and to what extent.
Why the Miller Act?
The Miller Act was initially set in motion during the Great Depression era, as a way to protect subcontractors and material suppliers on federal projects. The law, now administered and implemented under the Federal Acquisition Regulations (FAR), helps ensure payment is made to subcontractors and suppliers promptly. The posting of certain surety bonds is required on any public works contract that exceeds $100,000. That includes construction work, alteration, and repair of any building or public venue of the United States, awarded to any construction contractor.
Both performance bonds and payment bonds are necessary for federal construction projects under the Miller Act. Performance bonds are meant to protect the federal government’s interest in the project. Payment bonds, on the other hand, are designed to provide peace of mind to subcontractors and materials suppliers on the project, that they will receive what is owed to them for completing work. However, not all parties are covered under performance or payment bonds per the Miller Act. For instance, general contractors receive no protection through these requirements.
Requirements for Federal Construction Projects
The most straightforward requirement of the Miller Act is the monetary threshold imposed on contractors seeking awards of federal construction projects. Any contractor bidding on a federal construction project that exceeds $100,000 must meet Miller Act requirements of posting a performance bond and a payment bond. These bonds must be secured prior to receiving the award, and they must fall within the following parameters:
Performance bonds – the contracting officer of the project determines the adequate amount of protection needed from a performance bond to protect the federal government’s interest. This means 100% of the contract price is often required, although the contracting lead may make some exceptions in determining coverage of the bond.
Payment bonds – protection for suppliers and subcontractors are put in place with payment bonds, up to the total amount of the contract payable to the subcontractor or materials supplier. The contracting officer also determines the payment bond amount, but it cannot be less than the performance bond coverage.
One important aspect of the Miller Act to note is that payment bonds are designed to cover subcontractors and suppliers that have a direct contract with the prime contractor, also known as first-tier claimants. However, second-tier claimants, or those subcontractors and suppliers that have contracts with a subcontractor directly, may also fall under Miller Act bond coverage. Third-tier suppliers and subcontractors are not protected under the Miller Act.
Protections Under the Miller Act
As with many surety bonds, payment and performance bonds are designed to enforce obligations set forth in a specific contract or agreement. In the case of payment bonds, the surety company promises payment to subcontractors and suppliers of either first- or second-tiers if the general contractor fails to pay. With performance bonds, the surety company guarantees performance of the work agreed to by the general contractor. Additionally, the Miller Act also requires bonds to cover certain taxes. General contractors must pay taxes on wages relevant to work on the contract. Should the contractor fail to do so, a Miller Act performance bond claim may be made by the federal government to collect.
There are specific rules in place regarding Miller Act payment and performance bonds when it comes to the timeframe in which claims can be made. For first-tier contractors and suppliers, a 90-day time limit applies. This means that if payment has not been received in full within 90 days of completion of the project, a civil action can be made in the US District Court, where the contract was performed.
Second-tier contractors and suppliers also have a 90-day window to bring action against the contract under Miller Act bonds. If payment has not been received within this timeframe after work has been completed or has ceased, second-tier subcontractors and suppliers have the right to make a claim. A notice must be served to the general contractor that details the amount of the claim and the party who contracted for the labor or supplies.
Under the Miller Act, no subcontractor or supplier has the ability to bring any action more than one year after the completion date of the project. General contractors also have an opportunity to protect themselves from claims under Miller Act payment bonds by including a waiver. Contractors may require a waiver of the right to bring an action for subcontractors and suppliers, but this waiver must meet the following criteria:
- It must be in writing
- It must be signed by the person who is waiving their right to bring a claim
- It must be executed after the individual waiving their right has furnished materials or labor for the contract in question
Special Considerations for Surety Professionals
The Miller Act creates some confusion for surety professionals and general contractors surrounding what is recoverable and what is not under a claim. The following costs can be recovered with a valid claim against a payment bond, depending on the specifics of the project and bond claim:
- Labor performed as part of the contract
- Any material used or consumed on the project
- Rental costs associated with the contract
- Delay and costs incurred due to changes in the project
- Attorney’s fees and other relevant legal costs
Although these expenses are often recoverable as part of a claim under the Miller Act, there are explicit costs that cannot be recovered. These include materials that were not installed on a project or were moved to a different project, professional services not part of the scope of the project, and office personnel off-site.
Additionally, surety professionals and general contractors should understand the reality that the courts may interpret Miller Act claims differently, depending on the details of the project or failure to pay or perform. For instance, a recent case in California highlighted issues that may arise when certain waivers are included as part of a contract. General contractors may not have the authority to include waivers such as no-damage-for-delay clauses in contracts, particularly if the Miller Act guidelines for such waivers are not met. Subcontractors may have more leverage in making a successful claim if these regulations are circumvented in any way, leading to successful claims against the surety and the general contractor.
The Miller Act, overall, is a means to protect subcontractors and materials suppliers, as well as the federal government, from non-performance or non-payment on federal construction projects. However, the nuances involved in the claims process should performance or payment not be completed put general contractors and surety companies at risk. It is pertinent for contractors and surety professionals to understand the Miller Act rules and regulations, as well as the rights the law extends to subcontractors and suppliers. Understanding these details helps protect all parties involved, from start to finish on federal construction projects.