Last year, we posted about the differences between public and private projects, specifically discussing the impact on a construction party’s lien rights. The cliff notes to that post is this: when unpaid on a private project a party can file a lien, when unpaid on a state, county or federal project the party can only file a claim against the construction bond.
While normally a very efficient system for getting claims paid, a problem arises when there is no bond to claim against. This typically happens for one of two reasons: (1) The project cost is too low it doesn’t meet the minimum when bonds are required; or (2) A required bond just isn’t provided, contrary to the law.
Small Projects May Not Require Bonds
Not every county, state or federal project requires a bond. Depending on the applicable law, projects under $50,000 or $100,000 frequently do not require payment or performance bonds, leaving unpaid contractors without a bond claim remedy.
Under the federal Miller Act, for example, payment bonds are only required for projects that cost more than $100,000. 40 U.S. §3131. Those unpaid for construction materials or labor on these low-dollar projects will be unable to file a Miller Act bond claim
State and county requirements are very similar to the federal miller act (which is why it’s called the “little miller act,” after all). Many states, however, just have a different minimum project amount. In some states or counties, the minimum contract amount requiring a bond can be as low as $10,000 or $25,000.
Bonds May Not Be Provided Contrary to Law
The second reason why a bond may not be provided on a county, state or federal project is a lot more frustrating than the first reason. The problem is as easy to summarize as this: the law isn’t followed.
How, you may ask? Well, in my own personal experience I have encountered a few situations that may serve as examples. Once, the US Army Corps of Engineers decided that the multi-million dollar project didn’t require a bond because it wasn’t the type of work that fell under the Miller Act provisions (it was). In another circumstance, a small county government just didn’t require it out of ignorance. And finally, in the perhaps worst circumstance, a prime contractor provided a counterfeit bond and it was never examined or checked by the state.
In a fair world, there would be some remedy to these situations. When faced with these circumstances, however, the world is not always fair.
A great article about these circumstances was written on the Lorman website, titled: Without a Net: Subcontractor Has No Recourse Against Municipality for Failure to Require Bonds. The article addresses a natural first-reaction to finding out that a bond was not required, specifically wondering: Can we file suit against the government entity for dropping the ball?
The issue of whether a municipality may be held liable to a subcontractor for failing to require proper bonding in accordance with a state Little Miller Act has long been a topic of interest. Although some state statutory schemes provide an express cause of action against the municipality for failure to require bonds, they are in the minority. In states not having an express right of action, the general rule is that the municipality may not be held liable for failing to ensure that proper bonds are in place.