G. Scott Walters and Parker A. Lewton, Smith, Currie & Hancock LLP.
Enacted in 1935 and re-codified in 2002, the statute has consistently required performance and payment bonding on most construction contracts exceeding a historically-increasing threshold. Performance bonds guarantee that the contractor will perform the contract in accordance with its terms and conditions, while payment bonds guarantee that suppliers and subcontractors will be paid for material and work performed under the contract. A surety will post the required bonds, ensuring that, in the event of the contractor’s default, the surety will complete the contract by either taking over the contract, replacing the contractor with another, or funding the original contractor. Affected subcontractors will then have one year from the date on which labor was last performed or materials were last furnished to bring a claim against the surety and general contractor. The purpose of the statute and its predecessor, the Heard Act of 1894, is to protect subcontractors and suppliers and to ensure that the government receives full performance at a cost on which the parties agreed. Its long-standing history reflects the degree to which the statute is “deeply ingrained” in federal procurement policy. As such, courts and administrative boards will enforce the statute’s requirements strictly, including reading the requirements into a contract that is otherwise silent.
And, although not the focus of this article, contractors performing work for states should be aware of the respective state’s “Little” Miller Act. All states have enacted some form of a Miller Act, and each state’s “Little” Miller Act is likely to vary from the federal statute. Such variations may include differences in contract threshold and definitions of “public works.” Do not assume that bonding is not required if, for example, your contract is for less than $150,000. Also, where a procuring state or local public agency has failed to require payment bonds, some state Little Miller Act statutes make the agency directly liable to lower-tiered subcontractors and suppliers.
When does the federal Miller Act statute mandate bonding?
Performance and payment bonds become binding when the contract is awarded. On federal procurements, they are required “[b]efore any contract of more than $100,000 is awarded for the construction, alteration, or repair of any public building or public work of the Federal Government[.]” The FAR, however, implements the statute’s bonding requirements through sections 28.102-3 and 52.228-15, which place the bonding threshold at $150,000 for construction contracts (and offer additional forms of security for contracts between $35,000 and $150,000). And as the United States Court of Appeals for the Federal Circuit recently held in K-Con, Inc. v. Secretary of Army, regardless of whether these clauses are incorporated into your contract, their requirements will nonetheless be read into the solicitation and contract for construction under the Christian Doctrine. This is because the statute explicitly states that the bonds “must” be furnished, and the FAR both requires the bonds and directs insertion of the relevant clause.
Also important is understanding when your contract is for “construction, alteration, or repair.” In some cases, whether the contract is for construction, alteration, or repair is obvious. In other cases, it may be less clear. For example, courts have held that bonding is not statutorily mandated for federal emergency management and debris removal as this work does not involve the construction of a public building or public work of the United States. But what about a case in which the government issues contracts for pre-engineered metal buildings using the standard commercial items contract form? This was the case in K-Con, Inc. v. Secretary of Army. There, the contractor argued that the contracts were for commercial items and were, therefore, not subject to mandatory bonding requirements for construction. The government responded that the contracts were patently ambiguous, making it incumbent on the contractor to seek clarification from the government as to whether the contracts were for construction or commercial items. The court agreed with the government, providing a valuable lesson: If you are uncertain as to whether your contract carries mandatory bonding requirements due to a patent ambiguity, you must seek clarification from the contracting agency. If you do not, you will likely be barred from later arguing that your contract was exempt.
When can the government waive bonding requirements?
Other than in the case of cost-reimbursement contracts, there are just a handful of circumstances under which waiver can occur. The first allows a contracting officer the discretion to waive the requirement of a performance bond and payment bond for “work under a contract that is to be performed in a foreign country if the officer finds that it is impracticable for the contractor to furnish such bonds.” Second, Secretaries of the Army, Navy, Air Force, and Transportation may waive the requirements “with respect to cost-plus-a-fixed fee and other cost-type contracts for the construction, alteration, or repair of any public building or public work of the Federal Government and with respect to contracts for manufacturing, producing, furnishing, constructing, altering, repairing, processing, or assembling vessels, aircraft, munitions, materiel, or supplies for the Army, Navy, Air Force, or Coast Guard, respectively, regardless of the terms of the contracts as to payment or title.” Third, the Secretary of Transportation may also waive the requirements “with respect to contracts for the construction, alteration, or repair of vessels when the contract is made under [31 U.S. Code §§ 1535–1536] or [46 U.S. Code Subtitle V—Merchant Marine], regardless of the terms of the contracts as to payment or title.” And finally, the Secretary of Commerce may waive statute’s bonding requirements “with respect to contracts for the construction, alteration, or repair of vessels, regardless of the terms of the contracts as to payment or title, when the contract is made under the Act entitled ‘An Act to define the functions and duties of the Coast and Geodetic Survey, and for other purposes.’”
Not surprisingly, waiver of Miller Act bonding requirements is rare. According to a recent study performed by the GAO, neither the Department of Defense, the Department of Veterans Affairs, or the State Department has a tracking mechanism or data source to identify how often bonds are waived, but officials from the respective departments noted that waivers on construction contracts are exceedingly rare. An official from the Corps of Engineers, when asked by the GAO, said that he and his colleagues could not recall from their careers even one instance in which the bonding requirements were waived. An official from the VA said that in his almost 30 years of experience in construction contracting, he could recall only one waiver. For this reason, contractors should operate under the assumption that otherwise required bonds will not be waived.
In summary, federal bonding requirements are strictly enforced and waiver is extremely rare—assume bonding will be necessary if you are bidding a federal contract in excess of $150,000 for the construction, alteration, or repair of any public building or public work. If it is unclear whether the acquisition is for such construction, alteration, or repair, seek immediate clarification from the agency and consider seeking legal counsel.
The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.