The Miller Act, codified at 40 U.S.C. §§ 3131–3134, represents a Congressional effort to protect those supplying labor and material for the construction of federal public buildings or public works in lieu of the protections they might otherwise receive under state statutes if engaged in the construction of nonfederal buildings. A Miller Act payment bond guarantees payment to certain parties supplying labor and materials to contractors or subcontractors engaged in the construction, alteration, or repair of any public building or public work of the federal government. Absent the protection of a Miller Act payment bond, unpaid subcontractors and suppliers could find themselves without a viable remedy (other than a suit against a viable contractor or subcontractor) because there are no lien rights against public property.
The Miller Act is the modern-day remedy to the historical dilemma faced by subcontractors and suppliers denied compensation in federal construction projects. Historically, the common law doctrine of sovereign immunity has prevented liens against public property, and federal statutes allowed only those in privity of contract with the federal government to sue to enforce contractual rights. In the late 1800s, Congress recognized that other parties who contribute to the performance of a federal construction contract, including subcontractors, should in some way be assured payment of their claims. To address this concern, Congress enacted the Heard Act in 1894. In 1935, Congress repealed the Heard Act and enacted the Miller Act in its place. While the Miller Act repealed the Heard Act, the Miller Act was designed primarily to eliminate certain procedural limitations within the Heard Act while reinstating the Heard Act’s basic provisions and making it easier for unpaid creditors to realize the benefits of the statutorily required payment bond. The Miller Act has remained on the statute books ever since.
The Miller Act requires a general contractor on a federal construction project to furnish a payment bond “for the protection of all persons supplying labor and material in carrying out the work provided for in the contract.” 40 U.S.C. § 3133(b)(2). The Act requires that the amount of the payment bond be equal to “the total amount payable by the terms of the contract unless the officer awarding the contract determines, in a writing supported by specific findings, that a payment bond in that amount is impractical, in which case the contracting officer shall set the amount of the payment bond.” Id. Under the Miller Act, any person who has furnished labor or material in carrying out work on a federal construction project and who “has not been paid in full within 90 days after the day on which the person did or performed the last of labor or furnished or supplied the material for which the claim is made may bring a civil action on the payment bond for the amount unpaid at the time the civil action is brought and may prosecute the action to final execution and judgment for the amount due.” 40 U.S.C. § 3133(b)(1).
The Miller Act payment bond makes the surety the guarantor of payment to the prime contractor’s lower-tier subcontractors and suppliers according to the terms of the bond and the language of the Act. The language of the Miller Act is very broad and suggests that any party with any connection to the project could make a claim and recover under a Miller Act payment bond. In Clifford F. MacEvoy Co. v. United States ex rel. Tomkins Co., 322 U.S. 102 (1944), however, the United States Supreme Court defined and limited the scope of the Miller Act to two distinct classes of claimants. The first class of claimants is composed of all subcontractors, suppliers (also known as materialmen), and laborers who deal directly with the prime contractor. The second class of claimants is composed of all subcontractors, suppliers, and laborers who have a direct contractual relationship with a first-tier subcontractor. Effectively, the MacEvoy case limited Miller Act protection to only those parties that have a direct contractual relationship with the prime contractor or with a first-tier subcontractor. Thus, Miller Act protection is cut off at these levels and flows no further down the chain of contracts that leads back up to the prime contractor. This chain of contracts and the limitations on bond coverage is best understood when viewed graphically, as follows:
Click here to view the image.
When viewed graphically, it is readily apparent that the distinction between a subcontractor and supplier at the first tier is critical, as the classification of the first-tier entity will determine whether the Miller Act protects a second-tier claimant. The Miller Act protects suppliers to prime contractors and subcontractors, but does not protect suppliers to suppliers. Thus, whether a first-tier entity is considered to be a subcontractor or supplier is critical to determining whether the Miller Act covers a second-tier supplier to that first-tier entity.
If a second-tier material supplier furnishes materials or labor to a first-tier material supplier to the prime contractor, the second-tier material supplier cannot assert a claim on the Miller Act payment bond. This harsh rule can be avoided, however, if the second-tier material supplier can establish that the first-tier material supplier was in fact a “subcontractor” to the prime contractor, thereby making the second-tier material supplier a supplier to a first-tier subcontractor and thus covered by the payment bond. The challenge is in determining what a subcontractor is. The Miller Act itself makes no attempt to define the word “subcontractor.” The Miller Act is highly remedial in nature, however, and is liberally construed and applied by the courts in order to effectuate properly the Congressional intent to protect those whose labor and materials go into federal public projects. To determine whether a first-tier material supplier was in fact a “subcontractor” to the prime contractor for purposes of the Act, courts will focus on the contractual and commercial relationship between the first-tier material supplier and the prime contractor. A first-tier entity that merely supplies materials will fail to qualify as a first-tier subcontractor, while a first-tier entity that supplies and installs materials is more likely to meet the test and qualify as a first-tier subcontractor. Courts will also consider other factors including whether (1) the first-tier entity supplied customized materials that were designed or fabricated specifically for the project, having little or no commercial value outside the particular project, (2) the first-tier entity was responsible for performing a significant and definable part of the construction project, (3) the first-tier entity was required to post a payment or performance bond, (4) the first-tier entity’s price included sales tax, (5) progress payments were made and retainage was withheld, (6) the first-tier entity submitted shop drawings, and (7) the first-tier entity submitted certified payroll.
While at first blush it may seem fairly simple to sort out who is and who is not covered by a Miller Act payment bond, the analysis can sometimes be factually and legally complex. Accordingly, as soon as you are faced with the possibility of prosecuting or defending a Miller Act payment bond claim, you should always immediately seek the advice of a seasoned construction lawyer.