Federal construction has a financial requirement that service and supply contractors rarely encounter: bonds. Before a construction contractor can begin work on a project above a certain size, it must furnish a performance bond and a payment bond backed by an acceptable surety, and on sealed-bid projects it may need a bid guarantee just to be considered. The law behind this is the Miller Act of 1935.
Why bonds instead of liens
On private construction projects, subcontractors and suppliers who are not paid can file a mechanic’s lien against the property. Federal property cannot be liened. Without some substitute, the people who supply labor and materials to a federal project would have no security at all. The Miller Act solved the problem by requiring the prime contractor to post bonds: one that protects the government if the contractor fails to finish, and one that protects subcontractors and suppliers if the contractor fails to pay them.
The three bonds
- Bid guarantee. Required when the solicitation calls for performance and payment bonds, a bid guarantee assures the government that the bidder will sign the contract and furnish the required bonds if awarded. It is usually a bid bond for a percentage of the bid price, up to a cap set in the FAR. A bidder who fails to provide a required bid guarantee is generally rejected.
- Performance bond. Protects the government against the contractor’s failure to perform. The standard penal amount is 100 percent of the original contract price, and the surety steps in to complete or pay for completion if the contractor defaults.
- Payment bond. Protects subcontractors and suppliers. Its penal amount is also generally 100 percent of the contract price. Those who have not been paid can make a claim against the bond and, if necessary, sue the surety in federal court.
Who must bond and when
The Miller Act applies to contracts for the construction, alteration or repair of public buildings or public works of the United States above a dollar threshold set in the FAR, which has been adjusted over time; check the current figure at acquisition.gov. For construction contracts above the micro-purchase level but below the Miller Act threshold, the FAR requires alternative payment protection, which may be a payment bond, an irrevocable letter of credit, a certificate of deposit or other approved security. Bonds must be furnished before work begins, and the performance and payment bonds are usually due within a short period after award.
Corporate sureties must appear on the Treasury Department’s list of approved companies and write bonds within their listed underwriting limits. The FAR also allows individual sureties under strict rules about the assets pledged. Small contractors who struggle to obtain bonding may qualify for the SBA’s Surety Bond Guarantee Program, which guarantees a portion of the surety’s risk and makes participating sureties more willing to bond newer or smaller firms. Information is available at sba.gov.
Claims against the payment bond
A first-tier subcontractor or supplier with a direct contract with the prime can claim against the payment bond without special notice. A second-tier claimant, one dealing with a subcontractor rather than the prime, must give written notice to the prime within ninety days of its last labor or materials. Suits on the bond must generally be filed within one year of the claimant’s last work and in the federal district court where the contract was performed. Deadlines are strict, so anyone with an unpaid claim should talk with a lawyer promptly.
Planning for bonding
Bonding capacity is a business asset that takes time to build. Sureties evaluate a contractor’s financial statements, experience, backlog and management before setting an aggregate limit. Establish a surety relationship early, keep clean financials and complete projects on time, because each successful bonded job expands the capacity for the next. Bonding costs belong in every construction bid.