Construction participants on public projects deal with payment problems just like they do on private projects, and they need some way to be protected against nonpayment. But the industry’s go-to tool to manage payment issues – the mechanics lien – is not available on public projects.
To fill this gap, the vast majority of public projects require the prime contractor to obtain a payment bond to protect the other, “downstream” project participants from not getting paid for the work or labor they furnish to the project.
This illustrates another interesting distinction between private and public construction projects. On a private project, the party ultimately responsible for making sure that just about everyone on the project gets paid is the property owner. (This is because the mechanics lien attaches to the actual property itself, encumbering that property as a means to secure payment for the work.)
On the other hand, for a public project the bond must be obtained by the general contractor, not the public entity. This means that, while the public entity has an obligation to pay under the contract, the party actually shouldering the burden of remote claimants not getting paid is the GC.
A further offshoot is that on public projects, direct contractors (those contracting directly with the public entity) have no security or right to make a claim against the bond and the remedy for nonpayment is directly jumping to a lawsuit. (This is because the general contractor is the prime contractor, and they cannot file a claim against the bond that they themselves provided.)
To examine this, we can look at a representative Little Miller Act statute.
Who Is Protected by the Bond on a Public Project?
Generally, the parties protected by the bond are the “remote” or downstream project participants. But this protection only extends so far – for example, suppliers to suppliers are usually not protected by the payment bond on a public project, and some statutes limit the protection to parties within the first two tiers.
The payment bond is required to be obtained by the GC prior to the execution of the awarded contract. For example, in Pennsylvania, a bond is required on any job involving a public building or other public work or public improvement, when the work is to be more than $5,000.
In those cases, the prime contractor to whom the contract will be awarded must provide certain bonds (payment bond, performance bond, etc.). The required payment bond must be obtained for 100% of the contract amount. According to Pennsylvania statutes, “[s]uch bond shall be solely for the protection of claimants supplying labor or materials to the prime contractor to whom the contract was awarded, or to any of his subcontractors . . .”
Accordingly, direct contractors are not protected by the bond requirements set forth by the Pennsylvania Little Miller Act, and similar limitations on protection are found in other states throughout the country. The only determination of project role is with whom the potential claimant contracted. Parties who don’t identify themselves as “prime contractors” or “general contractors,” or don’t do GC-type work are nonetheless considered direct contractors if they contracted with the public entity directly, rather than with the bond-obtaining GC.
Free Webinar from Levelset
We’ve got a webinar coming up — “How to Get Paid on Public Projects” given by construction payment expert Charlotte McPherson. Watch it live or watch it later on demand – either way, the webinar is available free of charge and is perfect for anyone in the industry that works on public projects.
Getting back to the question posed in this article’s headline, if your construction company is on a public project and has contracted directly with the public entity, the remedy for nonpayment when the payment is due directly from the public entity is generally proceeding directly to a lawsuit (or arbitration if the contract requires, etc.)
In summary, on public projects:
1) a payment bond to take the place of the property in providing security for payment is generally required;
2) the GC is required to post the bond; and
3) the protection afforded by the bond is limited to subcontractors and suppliers of certain tiers.