Getting payment and performance is a requirement for federal construction contracts. However, problems arise when small businesses have a difficult time securing a Miller Act bond when bidding.
Payment and Performance Bonds Definition
Performance Bond Definition: As a practical matter, Miller Act performance bonds are for the benefit of the Agency. Prime contractors that do not perform under the terms and conditions of the contract can find themselves dealing with the surety.
Miller Act Payment Bond Definition: A payment bond serves as leverage when subcontractors or material men do not get paid from the prime contractor. This is a unique protection in federal government contracts. As compared to the commercial sector, subcontractors cannot place liens on government property. This law provides an alternative remedy.
- Miller Act by its terms only gives subcontractors the right to sue on the surety bond posted by the prime contractor.
- It does not give the right to recover losses directly from the Government if a prime goes insolvent.
Government’s Sovereign Immunity Defense for Subcontractor Performance Bond Claims: Going after the government often raises its defense of sovereign immunity. However, as it applies to the Miller Act, Section 10(a) of the APA waives sovereign immunity for claims “seeking relief other than money damages.”. The Supreme Court noted that “a waiver of sovereign immunity is to be strictly construed, in terms of its scope, in favor of the sovereign.” See Blue Fox, 525 U.S. at 261.
But the Court also made clear that state law equitable subrogation theories could not be asserted as monetary claims against the government by subcontractors and suppliers. Under payment and performance bond theories, the Court noted that “sovereign immunity left subcontractors and suppliers without a remedy against the Government when the general contractor became insolvent,” and that the Miller Act surety bond requirement was designed to cure that problem. See information about equitable subrogation and Miller Act claims.
Surety’s Role in a Construction Project? Frequent issues arise about your Miller Act bond with respect to performance bonding and Miller Act payment bond disputes and the surety’s role under the Miller Act. The reality is that a surety is not a party to a federal construction contract.
- Any payment and performance bonds needed for the contract shall be produced by the prime contract (did you know that bonding is not traditional insurance?)
- However, when the surety enters into a takeover contract, it now becomes a party and is in direct privity of contract with the government.
Problems Getting Miller Act Payment and Performance Bonds Across the U.S: Across the United States, there is an overwhelming problem for smaller businesses to set up a strong foundation to first understand the Miller Act payment and performance bond meaning and to then acquire such bonds.
What is the solution? Not much. Some companies try to set up teaming agreements with larger construction firms that may have sound bonding relationships with sureties.
However, there is a bigger problem. When bidders submit government proposals as a prime contractor, and propose teaming partners that are larger companies, the sureties do not like this type of relationship when making the decision to issue a payment and performance bond because the prime (small business) controls the contract. This creates more risk for the surety when issuing Miller Act bonds.
The bottom line is that the system as we know it does not address the actual problems faced in the construction marketplace.
When it comes to understanding the performance and payment bond meaning under the Miller Act, government contract law attempts to resolve this problem by introducing the concept of individual sureties under FAR 28. However, the reality of the agency allowing for Miller Act performance and payment bonds from an individual surety is almost non-existent in federal procurement. Therefore, commercial sureties arguably still control the government construction market. Find out more about Surety Bond Tips for Government Construction Contracts.
Given the current state of the economy, there are very few people stepping up to the plate to help smaller government construction contractors. If you are lucky to get both Miller Act payment and performance bonds, the price and fees are extremely high to individual sureties.
What is the Best Approach for Acquiring a Federal Miller Act Bond?
- Establish some credible past performance for successfully completing projects
- See if you can set up an approved joint venture that does not violate the size standards (commercial bonding companies prefer joint ventures instead of teaming agreements)
- Seek help through the SBA
If you are a subcontractor on a federal project, make sure that you have the prime’s surety information early in the performance phase. Getting guidance from a Federal Miller Act Bond attorney proves to be helpful.
If you are a construction company that is doing business with the federal government, you must develop a plan of action for understanding the Miller Act payment and performance bonds and applicable rules.