Historically, the common law doctrine of sovereign immunity prevented liens against public property, and federal statutes allowed only those in privity of contract with the federal government to sue to enforce contractual rights. To address this concern, Congress enacted the Heard Act in 1894. In 1935, Congress repealed the Heard Act and enacted the Miller Act in its place. The Miller Act requires that all general contractors post payment bonds on contracts in excess of $25,000.00. If the contracting officer determines that a payment bond in the full amount of the contract is impractical, he or she may set a different amount for the payment bond. Bonds of half the contract amount are common on federal jobs.
1. The Miller Act Coverage
The Miller Act payment bond makes the surety the guarantor of payment to the prime contractor’s lower-tier subcontractors and suppliers according to the terms of the bond and the language of the Miller Act. The language of the Miller Act is very broad and suggests that any party with any connection to the project could make a claim and recover under the Miller Act payment bond. In Clifford F. MacEvoy Co. v. U.S. for Use & Benefit of Calvin Tomkins Co.,[i] the U.S. Supreme Court defined and limited the scope of the Miller Act to two distinct classes of claimants:
- First-Tier Claimant: All subcontractors, suppliers, and laborers who deal directly with the prime contractor.
- Second-Tier Claimant: Subcontractors, suppliers and laborers who have a direct contractual relationship with a first-tier subcontractor.
Thus, the payment bond on federal projects covers only those claimants who (1) supply labor or material directly to the general contractor, or (2) supply labor or material directly to a first-tier subcontractor of the general contractor. Suppliers to suppliers are not protected. Thus, if a claimant supplies material or equipment to a supplier, although that entity may be working for the general contractor, the claimant is not protected by the bond. See chart below for an illustration of the first- and second-tier claimants:
2. Subcontractor / Supplier Distinction
The Miller Act makes no attempt to define the word “subcontractor.” The statute is highly remedial in nature, and is liberally construed and applied by the courts to protect those whose labor and materials go into federal public projects. To determine whether a first-tier material supplier was in fact a “subcontractor” to the prime contractor for purposes of the Miller Act, courts will focus on the contractual and commercial relationship between the first-tier material supplier and the prime contractor.
Distinction Between Subcontractor and Supplier:
The first-tier entity that merely supplies material will fail to qualify as a first-tier subcontractor, while a first-tier entity that supplies and installs material is more likely to meet the test and qualify as a first-tier subcontractor. Courts will consider the following factors in determining whether an entity is a subcontractor or a supplier:
- Whether the first-tier entity was responsible for performing a significant and definable part of the construction project;
- Whether the first-tier entity supplied customized materials that were designed or fabricated specifically for the project, and have little or no commercial value outside of the particular project;
- Whether the first-tier entity was required to post a payment or performance bond;
- Whether the first-tier entity’s price included sales tax;
- Whether the first-tier entity received progress payments and had retention withheld;
- Whether the first-tier entity submitted shop drawings; and
- Whether the first-tier entity submitted certified payroll.
Exclusion of Lower-Tier Subcontractors and Suppliers:
Although a second-tier subcontractor or supplier to a first-tier subcontractor of the general contractor is covered, all lower-tier subcontractors and suppliers are not. The rationale is that the general contractor has no practical way of assuring payments by or to a party that is too far removed from its control.
Comment: While, at first glance, it may seem fairly simple to sort out who is and who is not covered by the Miller Act payment bond, the analysis can at times be factually and legally complex. This is an area that, if faced, the contractor should seek legal advice of an experienced construction lawyer before jumping to conclusions. Just because a supplier signed a “subcontract” form with the general contractor, the courts may not elevate the form (i.e. the written subcontract) over the substance (i.e. mere supplying materials).
[i] 322 U.S. 102, 64 S. Ct. 890, 88 L. Ed. 1163 (1944).