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Bond Basics

Timothy R. Hughes, Esq.
Hughes & Associates, P.L.L.C.

Federal and state public projects generally require the contractor to obtain bonds. Claims against those bonds form a significant part of litigation on public projects. Understanding the basics of bonds and bond claims is important, particularly for subcontractors on the job. You should know exactly how far the bond protection extends, and what requirements are placed on you to exercise bond rights, before performing work on the job.

The “Miller Act” and “Little Miller Acts”

The Miller Act is a piece of federal legislation which requires contractors on federal public projects over $100,000 to secure performance and payment bonds for the project. The performance bond is secured to ensure completion of the federal project. The payment bond is secured “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.” 40 U.S.C.A. § 3131 (b)(2).

Theoretically, if the general contractor defaults, the owner can look to the surety company who issued the performance bond to finish the job. The surety may have various defenses that permit it to avoid finishing the project. In contrast, payment bonds are secured to ensure that subcontractors and suppliers on a job are paid. As an electrical subcontractor, you are more likely to be concerned with payment bonds than performance bonds.

Various states have enacted parallel legislation to cover public projects undertaken by individual states. Each state statute is generally called the “Little Miller Act” for that specific state. While the details vary from state to state, most states generally parallel the Miller Act language in requiring both performance and payment bonds for their public projects.

Who Is Protected by the Miller Act?

Case law interpreting the Miller Act provides that the payment bond protection applies to “first tier” subcontractors. Subcontractors and suppliers who contract directly with the prime contractor are entitled to protection. Case law further provides that certain second tier parties who supply labor or material directly to a subcontractor performing work are also protected. Second tier parties who contract with a materialman rather than a subcontractor are not protected. Third tier subcontractors or suppliers receive no protection whatsoever. The question of whether a party is a subcontractor or a materialman has naturally been hotly litigated and debated in many cases.

With regards to the various Little Miller Acts, you should be familiar with the extent of payment bond protection in your specific state. The same question of exactly how far the payment bond protection extends is also an issue on state projects. You should be aware of whether you are protected by the payment bond before you bid on the project.

Notice and Limitations Periods

Under the Miller Act, first tier subcontractors and suppliers are not required to provide notice of a claim to the prime contractor. Second tier claimants must give written notice of the claim within 90 days after the last labor or materials were furnished. 40 U.S.C.A. § 3133 (b). The notice must contain both the amount claimed and the name of the party to whom the material or labor was provided. 40 U.S.C.A. § 3133 (a). When in doubt, send the notice even if you believe it may not be required.

With regards to the statute of limitations, the Miller Act provides that a payment bond claimant cannot file suit until 90 days have passed after the last material or labor was provided to the project. The suit must be filed within one year of the last labor or material being provided to the project. 40 U.S.C.A. § 3133 (b).

Under the various Little Miller Acts, you can again expect to have state specific notice and limitations provisions. You may also have contractual notice and limitations periods contained in the individual bonds that were issued on the project. Some states may look to the bond if it has a shorter period, while other states would provide that the state statute provides a minimum amount of time for notice and for the claimant to file suit. You should be familiar with the rules that apply in your state to your bonds.

Conclusion

Bonds on public projects may offer a relatively quick and easy way for a subcontractor to obtain payment on a project. It is critical to know and understand the terms of the applicable bonds on your project and whether the bond coverage extends to you and your work on the job before you bid. Knowledge of these terms can permit you to assess your risk before the bid and can also dictate how aggressively you need to research the financial acumen and resources of the parties on the project before you get involved.