When performing work on a state construction project anywhere in the nation, those furnishing labor or materials to the project typically have bond claim rights in lieu of mechanics lien rights. These claims are secured pursuant to “Little Miller Act” statutes present in each state. Whenever a contractor or supplier goes unpaid on a state construction project, they can file a bond claim against the prime contractor’s payment bond on the project.
This works fantastically…if there is a bond.
There are some projects in every state that do not require a payment bond. These projects are in the minority of state works, and they are usually determined by the value of the project itself. Every state has different rules as to when a payment bond is and is not required, but generally speaking, the lower the value of the overall contract (not just a specific trade’s contract) determines the law’s applicability.
In the Commonwealth of Virginia, all transportation related projects greater than $250,000 traditionally required payment bonds. However, effective July 1, 2012, Virginia Code Section 2.2-4337 will be amended to increase this threshold, so that only those projects greater than $350,000 will require a bond. Accordingly, it’s possible that this law change will result in more un-bonded state construction projects in Virginia.
In consolation for this change, the Virginia statute will require contractors bidding on projects valued at $250,000 – $350,000 to at least try to obtain a bond. If the contract is denied by a surety company, they need to provide evidence of that to the state, and the state will conduct some “prequalification program” to qualify an unbonded prime contractor on these projects.
Why would Virginia make this change?
There’s always a public policy friction between protecting subcontractors and suppliers and making the bidding system more fair for smaller contractors. When you require a bond, you sometimes block out qualified small contractors from successfully bidding on the project, because they don’t have the same bonding capacity as bigger outfits. This, of course, makes it more risky for subcontractors and suppliers to work on those projects.
The legal change is very narrow, and we’ll soon see whether it results in any payment problems without bonding rights.