Prime contractors working on public projects are often required to provide a payment bond to ensure adequate financial protection for those subcontractors and suppliers providing labor, materials, equipment, or other services. For federal government projects, this requirement is contained in the Miller Act. 40 U.S.C. §§ 3131–3134. Many states have adopted similar laws, commonly known as “Little Miller Acts,” for work performed on state government projects. Unlike private projects, lien rights do not exist on public work and payment bonds provide an important source of recovery for contractors that have not been paid for their work.
Unfortunately, a prime contractor is often unaware of the number of various contractors and suppliers providing goods or services on its behalf, as its direct (first-tier) subcontractors may subcontract out a portion of the work to more remote contractors or suppliers (i.e., those not in direct contractual privity with the prime contractor). The unwary prime contractor may find itself in a payment predicament when it pays its subcontractor, and that subcontractor then fails to pass those funds down to the sub-subcontractor or supplier actually performing the work. In those instances, that lower-tier remote contractor will likely seek recovery against the prime contractor’s payment bond and the prime contractor could be liable for paying for the same work twice.
Many states, including Georgia and Florida, have implemented a statutory notice procedure requiring a “notice of commencement” be filed within a specified number of days of work commencing on the project. See, e.g., O.C.G.A. § 36-91-90 et seq. and Fla. Stat. § 255.05 et seq. This notice is typically required to contain certain information, including identification of the payment bond surety, for the benefit of other parties such as remote subcontractors. Typically, either the project owner or the prime contractor file this notice of commencement and ensure a copy is posted on the project. If such notice is required, it is critically important to comply with the particular statutory requirements, which may range from use of a particular form to inclusion of specific information. If properly filed and posted, then remote subcontractors and suppliers have an affirmative duty to provide notice that they are providing materials or services to the project within a certain time period of first providing services or materials. This subsequent “notice to contractor” is intended to notify the prime contractor of potential payment bond claimants in order for the prime contractor to ensure proper payments are made during the project. Often, if no such notice is provided to the prime contractor, then the ability to pursue subsequent bond claims is limited. If the prime contractor receives notice from remote subcontractors, it is able to request acknowledgement of payments from those entities on a regular basis and as a condition precedent to paying its subcontractor. If, however, the prime contractor fails to file and post the required notice of commencement, then remote subcontractors may no longer have an obligation to identify themselves, leaving the prime contractor susceptible to “surprise” claims against its payment bond.
Other states, like North Carolina, require the prime contractor to provide a “project statement” to each direct subcontractor that contains similar information, which statement is then required to be passed down to lower-tier remote subcontractors. See N.C.G.S. § 44-A27 et seq. The North Carolina law goes so far as to require this statement be provided before any subcontract agreements are enforceable against the lower-tier subcontractor or supplier.
Some states have no preliminary notice requirement and only require remote subcontractors or suppliers to notify the prime contractor of nonpayment after the work has already been performed. Texas law, for instance, only requires a potential claimant to provide notice of the bond claim “on or before the 15th day of the third month after each month” that work was performed. Tex. Gov’t Code § 2253.041. By the time that period elapses, the prime contractor may not have enough of a subcontract balance remaining on the subcontract to cover the amount of the claim and be exposed to liability for the difference.
When claims are made by remote contractors against a prime contractor’s payment bond, the surety typically pays the claim and seeks reimbursement from the prime contractor. If the prime contractor has already paid its subcontractor, who subsequently failed to pay the remote contractor, then the prime contractor may end up paying twice. So what measures can prime contractors implement to identify potential bond claimants so as to avoid paying for the same work twice?
- Where commencement notices are required, the prime contractor should be sure to comply with all statutory requirements so that remote contractors are obligated to identify themselves early in the project. Further, whenever copies of a prime contractor’s notice of commencement or payment bond are requested by a lower-tier subcontractor or supplier, the prime contractor should provide it in the required timeframe.
- The prudent prime contractor will track the payment status of all remote subcontractors from which a “notice to contractor” has been received. Prior to issuing first-tier subcontractor payments, the prime contractor should obtain bond and lien waivers from each such remote subcontractor.
- In an abundance of caution, or in jurisdictions where no preliminary notice is required of remote subcontractors, prime contractors should carefully review their subcontractor’s payment process and not simply rely on a sworn certification. The prime contractor can require detailed supporting documentation for each subcontractor payment application, including invoices received and proof of payments made to coincide with those invoices. The subcontractor should be required to support every dollar it is seeking for any given period of work and show that it has satisfied its prior payment obligations.
- Prime contractors should diligently review subcontractor payment applications to ensure the subcontractor does not “get ahead” of the work progress—this affords the prime contractor the best opportunity to retain sufficient funds in the subcontract balance should there be any surprise payment bond claims.
Effective communication between the prime contractor and its subcontractors is a critical element in warding off payment bond claims. Understanding who is really performing the work on the project and ensuring those parties are paid appropriately is crucial to preventing surprise claims and double-payment liability. Given that there could be hundreds of potential bond claimants on a particular project, it is beneficial for all parties involved to understand and comply with all legal requirements in order to maintain the right to recover for work performed.