By: Diana Lyn Curtis McGraw Associate, Fox Rothschild LLP.
The Miller Act (the “Act”), which requires the prime contractor to furnish a performance bond and a payment bond to the government, protects “all persons supplying labor and materials carrying out the work provided for in the contract.”[1] Despite its broad language, courts have limited the parties who may actually assert a claim under the Act. This article introduces general background of the Act, identifies subcontractors who may qualify for protections under the Act, and suggests ways to preserve the rights as prime contractors.
Brief Background of the Miller Act
Under the Miller Act, there are two types of bonds the prime contractor furnishes to the government in a federal construction contract of more than $100,000[2]
1. Performance Bond
A performance bond protects the United States and guarantees the completion of the project in accordance with the contract’s terms and conditions.[3] This bond must be with a surety that is satisfactory to the officer awarding the contract and in the amount the officer considers adequate for government protection.[4] If a contractor abandons a project or fails to perform, the bond itself will cover the government’s cost of substitute performance. Thus, the performance bond disincentivizes contractors from abandoning projects and provides the government with reassurance that an abandonment will not create delays or additional expenses.
2. Payment Bond
On the other hand, a payment bond is required as security for the protection of those supplying labor and/or material in public building construction.[5] The payment bond must also be with a surety satisfactory to the officer awarding the contract, and the amount of the bond must be equal to the total amount payable by the terms of the contract.[6] However, if the officer awarding the contract determines that the total amount of payment bond is impractical, he or she may set the amount of the payment bond, so long as it is not less than the amount of the performance bond.[7] In such event, the officer is required to set forth this determination in writing supported by specific findings.[8]
Are You Protected Under the Act?
In general, the Miller Act provides a remedy to subcontractors and suppliers.[9] For example, when a subcontractor fully performs its contractual obligations on a federal government construction project, and the prime contractor fails or refuses to pay the subcontractor for its work, a surety must pay the agreed upon compensation.[10]
However, in Clifford F. MacEvoy Co. v. U.S. ex rel. Tomkins Co., the United States Supreme Court narrowed the scope of the Miller Act.[11] The parties that may assert a claim under the Act are limited to: (1) first-tier subcontractors (those who contracted directly with the prime contractor); (2) second-tier subcontractors (those who contracted with the first-tier); (3) first-tier material suppliers (those who contracted with the prime contractor); and (4) second-tier material suppliers (those who contracted with the first-tier subcontractors).[12] Accordingly, the payment bond covers subcontractors and suppliers of material who have “direct contracts” with the prime contractor, while also covering subcontractors and “material” suppliers who have contracts with a first-tier subcontractor.[13]
Because protection is limited to parties who have a direct contractual relationship with either the prime contractor or a first-tier subcontractor, federal subcontractors and suppliers lower than the second tier cannot recover payment under the Act.[14] Specifically, the Act does not protect the supplier-to-supplier relationship.[15] If a second-tier material supplier wishes to circumvent this harsh rule, it must establish that the first-tier material supplier was a “subcontractor” to the prime contractor. Doing so would make the second-tier material supplier a supplier to a first-tier subcontractor, and thus, the payment bond would cover the supplier. Therefore, the determination of whether a first-tier entity is considered a subcontractor or supplier is critical in determining whether a second-tier supplier is covered by the Miller Act.
1. Are You a Material Supplier?
The Miller Act prohibits suppliers from recovering if they furnish capital equipment. Instead, suppliers must furnish a “material” in connection with the work to recover under the Act.[16] Thus, prohibiting suppliers from furnishing capital equipment places another limitation on suppliers.
To distinguish between materials and capital equipment, courts look at the “expected substantial consumption” from the perspective of a supplier’s reasonable expectation.[17] Suppliers need not demonstrate the materials were substantially consumed on the project involved, nor are they required to show that the materials were not diverted to some other project.[18] Rather, they should establish whether the equipment leased to the prime contractor was reasonably expected to be consumed or substantially consumed in the performance of the contract, so that it might be considered as a material.[19]
2. Do You Qualify as a Laborer?
To recover for unpaid work under the Miller Act, the subcontractor’s work must: (1) be performed “in the prosecution of work provided for in a contract for which a payment bond is furnished”; and (2) qualify as “labor” within the meaning of the Act.[20] While the contract typically provides for the performance of work, the issue is whether a subcontractor’s work qualifies as “labor.”[21] Federal Courts have wrestled with this issue, and there is still no bright line test to determine what constitutes “labor” under the Act.[22] Thus, professionals providing services for the benefit of a project might be entitled to make claims under the Act as “laborers.” Federal courts have held that labor must include physical work, but may also include supervisory work, so long as the superintending, supervision, or inspection is done on-site.[23]
Circuit courts also addressed the issue of whether project administration and contract administration qualify as labor under the Act. The Eighth Circuit held that “the on-site supervisory work of a project manager falls within the purview of the Miller Act if such a superintendent did some physical labor at the job site or might have been called upon to do some on-site manual work in the regular course of his job.”[24] Thus, paying invoices, reviewing proposals, and other administrative tasks, even if performed at the job site, do not fall within the purview of the Miller Act.[25] The Fifth Circuit adopted this principle, but held that a project manager living on-site and cleaning the office and bathrooms, along with other managerial duties, was not entitled to the same protection.[26] The court rationalized its decision by positing that the work done in addition to the managerial duties was not enough to qualify as labor under the Miller Act.[27]
a. Example of an Architect / Engineer
Over the past two decades, federal agencies have shifted from the traditional design-bid-build method to the design-build method.[28] The design-build method involves the integration of design and construction services within a single contract, where the prime contractor bears the responsibility for both the project design and construction. Under this method, the design firm is similarly situated to a subcontractor; however, the Miller Act was not intended to protect design firms. A design firm that provides professional services to a prime contractor of a federal project will not have rights under the Miller Act to make a claim against the prime contractor’s payment bond, unless the designer performs on-site supervision or inspection duties in addition to “typical” design services.[29]
In United States ex rel. Thayer v. Metro Constr. Corp., the court held that an engineer who prepared designs, drawings, and specifications was not afforded the Miller Act protection.[30] Because the plaintiff was not a consulting engineer, did not have a supervisory role, and had no obligation to “see that the contract was completed,” the court ruled that the plaintiff could not recover payment under the Act.[31] Since Thayer, some courts have adopted a similar line of reasoning and focused on the nature of the services provided. The court in Naberhaus-Burke found that an engineer could recover under the Miller Act, but only for the performance of on-site services that included actual superintending, supervision, or inspection of the project.[32] Indeed, the rule of what constitutes labor is ambiguous, but if the work includes some level of “physical” exertion, there is a better chance the Miller Act will protect the work as “labor.”
3. Have You Perfected Your Claim?
Subject to the exceptions discussed above, every person that has furnished labor or material in carrying out work provided for in a contract, and has not been paid in full within ninety days after the day on which the person last performed the labor or supplied the material, may bring a civil action on the payment bond for the amount unpaid at the time the action is brought.[33] First-tier subcontractors and suppliers are not required to provide any notice to the prime contractor prior to filing a civil action.[34] Such is not the case for parties who did not directly contract with the prime contractor.[35] Laborers and suppliers with no direct relationship to the prime contractor furnishing the payment bond must give the prime contractor written notice within ninety days from the date on which they last furnished labor or materials.[36]
The notice must: (1) be in writing; (2) state with “substantial accuracy” the monetary amount claimed; (3) name the party to or for whom the labor or material was furnished; and (4) be delivered by any means that provides written verification of delivery or by any means by which the United States marshal of the district in which the project is located may serve summonses.[37] The notice requirement is important because it provides prime contractor’s with a firm date after which it may pay its subcontractors without fear of future liability to laborers or suppliers of those contracts.[38] Accordingly, the notice requirement is strictly enforced, and the failure to comply with such requirement precludes a Miller Act claim.[39]
As noted, the Act only requires persons to deliver notice to the prime contractor.[40] Thus, subcontractors and suppliers need not notify the governmental entity commissioning the project or the prime contractor’s surety.[41] It is the prime contractor’s duty to forward notice of the claim to the surety. However, for greater protection, the subcontractors can forward the notice to the surety as well. Thereafter, the surety will typically investigate the claim, and either the prime contractor or the surety will pay. If, however, the surety rejects the claim and refuses the pay, a claimant may then file a lawsuit to enforce their Miller Act claim.[42]
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[1] See 40 U.S.C. §§ 3131–3134 (emphasis added). [2] 40 U.S.C. § 3131 [3] Id. [4] Id. [5] 40 U.S.C. § 3131(b)(2) [6] 40 U.S.C. § 3131 [7] Id. [8] Id. [9] See Patriot Constr. & Equip., LLC v. Rage Logistics, LLC, 215 So.3d 844, 853 (3d Cir. 2016) (providing supplier of materials used by subcontractors for public works project had a right to maintain action). [10] See 40 U.S.C. § 3133; U.S. v. Berkley Reg’l Ins., 986 F. Supp. 2d 660, 665 (D. Md. 2013). [11] Clifford F. MacEvoy Co. v. U.S. ex rel. Tomkins Co., 322 U.S. 102, 105 (1944). [12] Id. [13] See U.S. ex rel K & M Corp v. A & M Gregos, Inc., 607 F.2d 44, 46-7 (3d Cir. 1979). [14] See U.S.C. § 3133(b); In re Garden State Erectors, Inc., 599 F.2d 1279, 1281 (3d Cir. 1979) (holding that a third-tier subcontractor with no contractual ties to the first-tier or primary subcontractor is too remotely connected with the subcontractor to recover under the Act). [15] See Clifford 322 U.S. at 105-06 (expounding that a second-tier material supplier who supplied a first-tier material supplier and not a first-tier subcontractor could not recover under the Act). [16] U.S. ex rel. Bros. Builders Supply Co. v. Old World Artisans, Inc., 702 F. Supp. 1561, 1565 (N.D. Ga. 1988) (stating that equipment that a subcontractor can use for non-government jobs is not protected). [17] Id. [18] Id. [19] See Transamerica Premier Ins. v. Ober, 894 F. Supp. 471, 483 (D. Me. 1995) (holding boat, pipeline, and pipeline barge, were “capital equipment” for which the subcontractors could not recover under the Miller Act). [20] See U.S. ex rel. Naberhaus-Burke, Inc. v. Butt & Head, Inc., 535 F. Supp. 1155, 1158 (S.D. Ohio 1982). [21] Id. [22] Id. [23] Id. (holding that the term labor has been construed to include physical toil, but also includes architects or another professional who superintends the work on the job site). [24] U.S. ex rel. Olson v. W.H. Cates Const. Co., 972 F.2d 987, 991 (8th Cir. 1992). [25] U.S. ex rel. Constructers, Inc. v. Gulf Ins., 313 F. Supp. 2d 593, 597 (E.D. Va. 2004). [26] United States v. Fed. Ins., 251 Fed.Appx. 269, 272-73 (5th Cir. 2007). [27] Id. [28] Design-bid-build is a method where the project owner first hires a designer who draws up the building plans. Subsequently, contractors bid on the completed plans, and the project owner hires a contractor based on the bids. This process has been used almost as long as construction has been an industry. On the other hand, the design-build method involves a project owner that hires a design-builder to draw up the building plans and construct the project. The design-builder can hire design consultants and subcontractors as needed. [29] See United States ex rel. Thayer v. Metro Constr. Corp., 330 F. Supp. 386, 387-88 (E.D. Va. 1971) (illustrating that “typical” design services include the preparation of plans, details, and specifications). [30] Id. at 397-88. [31] Id. at 388. [32] U.S. ex rel. Naberhaus-Burke, 535 F. Supp. at 1160; see also United States ex rel. Olson v. W.H. Cates Constr. Co., 972 F.2d 987, 990 (8th Cir. 1992) (“only certain professional supervisory work is covered by the Miller Act, namely, skilled professional work which involves actual superintending, supervision, or inspection at the job site”).[33] See 40 U.S.C. § 3133(b)(2). [34] Id. [35] See 40 U.S.C. § 3133(b)(2). [36] See id.; Ramona Equip. Rental, Inc. ex rel. U.S. v. Carolina Cas. Ins. Co., 755 F.3d 1063, 1067 (9th Cir. 2014); Noland Co. v. Allied Contractors, Inc., 273 F.2d 917, 920 (4th Cir. 1959) (holding that where there are multiple deliveries or contracts, the “measuring date will be the date where the last material is furnished under the last contract). [37] See 40 U.S.C. § 3133(b)(2); see also Pittsburgh Builder Supply Co. v. Westmoreland Const. Co., 702 F. Supp. 106, 109 (W.D. Pa. 1989) (holding that actual, but not written, notice was insufficient to satisfy the ninety-day notice requirement). [38] Ramona, 755 F.3d at 1067. [39] Id. [40] See 40 U.S.C. § 3133(b)(2). [41] Id. [42] F.D. Rich Co., Inc. v. U.S. ex rel. Indus. Lumber Co., 417 U.S. 116 (1974) (positing action was brought under the Miller Act against prime contractor on federal project and its surety).