Government Construction Contracting Part 1: The Miller Act – Bonds of Contractors on Federal Public Projects
As discussed in our 2020 segment “Florida’s Construction Lien Laws,” liens provide a contractor that is performing construction services for an improvement to a piece of land an ability to protect their interest via maintaining a right to record a lien on the land. However, unlike private residential and commercial projects, contractors are typically not afforded the same protection when performing work on public projects. The reasoning behind this is that the federal government will not allow a contractor to lien and then foreclose upon (i.e. force the sale of) a public piece of land to secure the monies owed to it in a public project dispute.
How, then, does a contractor protect its interest in a public land improvement? The federal government enacted 40 U.S.C. §§ 3131-3134 (commonly referred to as the ““Miller Act”) in an effort to provide this assurance. The following is the first of three installments discussing contractors’, subcontractors’, and sub-subcontractors’ rights and obligations under government public works and building project contracts.
First, when the public works or building contract is in excess of $100,000.00, 40 U.S.C. §3131 – the Miller Act requires a contractor that is bidding on a public project (i.e. the prime contractor) to provide both a performance bond and a payment bond with its bid to the federal government. The following are explanations of both, and the parties involved.
A. Performance Bond
A Performance Bond is a bond issued by one contracting party to another (in this instance, issued by the prime contractor to the federal government) to guarantee performance and completion of the project if the contractor is unable to meet its obligations under its contract. Under the Miller Act, the performance bond must be “in an amount the [contracting] officer considers adequate, for the protection of the Government.” 40 U.S.C. §3131(b)(1).
B. Payment Bond
A Payment Bond is a bond that provides subcontractors and material providers with assurance that they will be paid properly for work performed on a given project. This ensures that these subcontracting entities will be paid on time and in accordance with their contract. In addition, this bond provides the owner (i.e. federal government) with assurance that downstream contractors will be paid for work performed on their project. Under the Miller Act, the bond must be issued “for the protection of all persons supplying labor and material in carrying out the work provided for in the contract for the use of each person” and in an amount equal to or greater than the performance bond. 40 U.S.C. §3131(b)(2).
C. Parties to a bond
There are typically three parties to a bond: the Principal, the Obligee, and the Surety. The Principal is the entity performing the work (here, the prime contractor). The Obligee is the entity to receive the work (i.e. the federal government). Finally, the Surety is the financial institution that is issuing the bond.
Of note, while the Miller Act requires these bonds to be in an amount equal to that which would cover the cost of the project, the bond amount should also contemplate any taxes which may be imposed and collected by the federal government for work on the project.
Also, while this bond requirement is mandatory for all federal public works and building projects taking place within the United States, the contracting officer may waive such bond requirement for contracts performed in foreign countries.
In this blog, we discussed how contractors can protect themselves when performing work on public projects. We also discussed when a bond is needed on a federal government construction project – for public works or building contracts in excess of $100,000.00 – and the types and meaning of each bond that is required. Next in our federal government construction contracting – The Miller Act – series, we will discuss the rights of contractors, subcontractors, and sub-subcontractors performing work on a bonded federal government project. Stay Tuned!
For more information on bond requirements and how they may impact your business or a project you are currently working or seeking to bid on, do not hesitate to contact us via the link below.