Federal Contracting Series – Part Six

Keep Your Liens Off My Lawn!

The Miller Act and You

By: Gregory L. Shelton
Horack, Talley, Pharr & Lowndes, P.A.
gshelton@horacktalley.com

Think about what would happen if contractors, subcontractors, and suppliers could file a mechanic’s lien on a government project. The sheriff could actually sell the courthouse on the courthouse steps. The White House could be turned into a bed and breakfast (ok, bad example). And Congress could be sold and converted into a skate park, all because the general contractor failed to pay the guy who installed the mahogany panels in the smoke filled rooms.

In 1935, Congress enacted the Miller Act to provide a remedy to certain unpaid subcontractors and suppliers. The Miller Act requires the prime contractor to obtain a payment bond on projects involving the construction, alteration, or repair of a “public building” or “public work” of the United States. A payment bond is not required on projects where the contract amount is less than $100,000.00.

In theory, the payment bond replaces the security otherwise provided by a lien upon the property, and an unpaid sub or supplier is not left to rely solely on the credit of the prime contractor. The prime (general) contractor pays a premium for the payment bond in much the same way an insured pays a premium for insurance. But there are significant differences between an insurance policy and a surety bond. Insurance is a two party agreement between and insurer and its insured, whereas surety agreements involve three parties: the surety, the principal (the person or entity purchasing the bond); and the obligee (the person or entity entitled to assert a claim against the bond). The difference does not end there. Unlike insurance, the surety is entitled to indemnity (reimbursement) from the contractor who obtained the bond. In the payment bond context, the principal’s duty to indemnify the surety places the contractor at risk of paying twice if a subcontractor misapplies contract funds and fails to pay the second tier.

The notice requirements and filing rules under the Miller Act are technical and strictly enforced. Claimants should consult with an experienced construction lawyer for assistance in this process.

In a nutshell, the Miller Act limits payment bond claimants to: (1) those who supply labor or materials directly to the prime contractor (first tier subs and suppliers); and (2) those who supply labor or materials directly to a subcontractor of the prime contractor (second tier subcontractors and second tier suppliers who supply material to a subcontractor). Suppliers of suppliers are out of luck under the Miller Act.

The first step in exercising rights under a Miller Act payment bond is to obtain a copy of the payment bond. The payment bond is usually two to five pages long and contains the names and addresses of the owner, the prime contractor, and the surety company (bonding company), the terms of the bond, and the penal sum (limit) of the bond.

The next step is to provide the prime contractor with proper and timely notice, if applicable. First tier contractors deal directly with the prime contractor, so no formal notice is required. Second tier subcontractors and suppliers, however, must serve the prime contractor with notice of the claim within 90 days after last furnishing.

The final step is to file suit on the payment bond against the surety and other appropriate defendants within one year of the claimant’s last furnishing, but no sooner than 90 days after last furnishing.

If you work on property owned by Uncle Sam, get a copy of the payment bond as soon as possible.  Otherwise, you may end up donating your work to We The People.

About Gregory L. Shelton

Gregory L. Shelton is a construction lawyer licensed to practice in North Carolina, South Carolina, and Florida. He is Florida board certified as a construction law specialist. He practices at Horack, Talley, Pharr & Lowndes, P.A. Phone: (704) 377-2500 Fax: (704) 716-0905 Email: GShelton@horacktalley.com.
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