Miller Act: Performance and Payment Bonds

Payment and other protections for subcontractors on federal contracts are of perennial interest to Members and committees of Congress, in part, because many subcontractors are small businesses, and it is the “declared policy of the Congress that the Government should aid, counsel, assist, and protect, insofar as is possible, the interests of small business concerns.” Subcontractors on federal contracts are not in privity of contract, or direct contractual relationship, between the government and the subcontractors. As such, subcontractors would generally lack the payment and other protections that federal prime contractors enjoy. However, Congress has enacted several measures that give small business and other subcontractors certain protections. Key among these are the Miller Act, the 1988 amendments to the Prompt Payment Act, and Section 8(d) of the Small Business Act.

The Miller Act of 1935, as amended, authorizes subcontractors who furnished labor or materials used in carrying out federal construction projects valued in excess of $150,000 to bring a civil action against prime contractors’ payment bonds to obtain payments due. Congress enacted the Miller Act to compensate for the difficulties that subcontractors would otherwise have in obtaining payment from federal construction contractors, given that they cannot place a mechanic’s lien on the work because the government has sovereign immunity. The doctrine of sovereign immunity protects the government from being sued without its consent, and the Contract Disputes Act waives the government’s sovereign immunity only as to suits involving contracts to which the government is a party, not subcontracts under these contracts. Relatedly, because there is no privity of contract between the government and the subcontractor, the subcontractor generally cannot sue to enforce the payment or other terms of the subcontract against the government.

The 1988 amendments to the Prompt Payment Act provide an additional form of payment protection for subcontractors on federal construction contracts by requiring federal agencies to include in their contracts a clause obligating the prime contractor to pay the subcontractor for “satisfactory” performance within seven days of receiving payment from the government. Absent such a clause in the prime contract, the prime contractor would generally be free to agree to whatever payment terms it wishes with the subcontractor and would not necessarily pay the subcontractor as quickly. However, the federal government cannot be interpleaded as a party to any disputes between contractors and subcontractors over late payments or interest, and contractors’ obligations to pay subcontractors cannot be passed on to the federal government in any way, including by contract modifications or cost-reimbursement claims.

Section 8(d) of the Small Business Act provides yet another payment protection for subcontractors by requiring that prime contractors notify the contracting officer in writing whenever they pay a “reduced price” to a subcontractor for completed work, or whenever payment is more than 90 days past due. Section 8(d) also (1) generally requires that prime contractors agree to plans for subcontracting certain percentages of the work to be performed under federal contracts to various types of small businesses; and (2) make “good faith efforts” to work with the subcontractors whom they “used” in preparing their bids or proposals, and provide the contracting officer with a written explanation whenever they fail to do so. Without these subcontracting plans, or similar contract terms, prime contractors would generally be free to subcontract with whomever they wish for the completion of work under the contract and would not be required to deal with various categories of small businesses.

More information on how payment bonds protect subcontractors and suppliers found here.
 
Reference: 
Legal Protections for Subcontractors on Federal Prime Contracts, Congressional Research Service, January 27, 2014.