For this week’s Guest Post Friday, Construction Law Musings welcomes Danielle Rodabaugh. Danielle (@DaRodabaugh) is a principal for Surety Bonds.com, an agency that issues surety bonds to individuals and businesses across the nation. She writes articles to clarify bonding rules and regulations for those who have a stake in the surety bond industry–from contractors to telemarketers, and every professional in between.

In construction we often value performance and payment bonds when considering how to protect the financial investments put into a project. We do so because these bonds provide a legal financial guarantee that the selected contractor will fulfill the contract. However, a third, equally protective kind of construction bond is often overlooked.

Before an official contract has been agreed to and successfully executed, bid bonds guarantee that the selected low-bidder will officially enter into the contract at a later date. Bidders must submit a bid bond with their bid. Without doing so, the bidder becomes non-responsive–or an invalid candidate. Sometimes we overlook the benefits provided by this kind of Virginia surety bond, and yet they frequently act as the only legal protection for a project prior to groundbreaking.

The purpose of bid bonds
The primary purpose of a bid bond is to assure the client funding the project that the low bidder will enter into a contract for the price quoted in its bid. This has two major benefits:

1. The low bidder is now unable to increase its bid on the project.
2. If the contractor refuses to enter into the official contract with the client at a later time, the bond allows the client to recover the difference between the accepted bid and the next-lowest bid.

Bid bonds also mandate that the bidder will secure other required performance and payment bonds as necessary, reaffirming that the contractor will fulfill its duties to the developer.

Bid bond forfeiture
If the principal should decide to opt out of the contract, then the entity will be held accountable for paying reparation in the amount of:

• the difference between the amount of the faulty bidder’s bid and the next-lowest bid or, if a lesser sum:
• the face value of the bond

If a principal breaks the contract, the obligee usually collects damages in the amount of how much more they now have to pay to contract the next-lowest bidder for the project. In such collection cases it’s not unusual for courts to base their decisions on precendent rather than legal stipulations, as regulations in the bonding industry are constantly evolving.

Bid bond costs
If you’re a bidder, you need to check to see whether a bid bond is needed before you start preparing a bid so that you can estimate what the approximate penal sum will be. As with other construction bonds, all publicly-funded projects in Virginia that exceed $100,000 require a bid bond. A bond’s penal sum varies for many reasons, including:

• the project’s total projected cost
• contract terms
• the area in which the contract is executed

Depending on the jurisdiction, the principal usually needs to provide between 5 and 10 percent of the bid upfront to guarantee its accountability to the client. Federally-funded projects usually set a higher standard of 20 percent. For example, if a contractor bids $100,000 on a project, the entity will need to provide a $5,000 to $10,000 (or $20,000 for a federally-funded project) bid bond prior to beginning work. This cost is calculated to protect the owner in case the low-bidder opts out of the contract, and the surety will not pay more than this amount if the principal defaults on the bond’s payment.

For construction professionals working on a smaller scale, the U.S. Small Business Administration offers a surety program for small businesses. The SBA can also guarantee bonds for contracts up to $2 million for riskier principals. Small and emerging contractors who cannot obtain surety bonds through regular commercial channels can take advantage of the SBA to back their bid, performance, and payment bonds.

© Construction Law Musings- Richmond, VA is licensed under a Creative Commons Attribution-No Derivative Works 3.0 U.S. license.

Here at Construction Law Musings, we are quite fond of the Federal Miller Act and it’s Virginia counterpart, the “Little” Miller Act.  Both of these statutes allow a subcontractor or supplier on a government construction project the security to perform their work with the knowledge that a bonding company will back their claim for payment.  These acts are necessary because a construction company cannot file a mechanic’s lien on a government owned piece of property.

As a general rule the Miller Acts impose almost strict liability on a contractor and its surety to pay for work performed by a downstream supplier or subcontractor.  However, as a recent case out of the Fourth Circuit Court of Appeals makes clear, this rule is not without exceptions.

In US ex rel Damuth Services v. Western Surety, et al., the Virginia based federal appellate court examined a side deal between a mechanical contractor and its supplier regarding payment for equipment supplied to a project in Chesapeake, VA.    In the Damuth case, the Plaintiff entered into an agreement with the mechanical subcontractor (H & L) for full payment for other work unrelated to the Chesapeake project and for payments over time until Damuth was paid in full after finding out that H & L used payments on the project to pay for work performed elsewhere.  Furthermore (and this was the kicker), Dalmuth agreed not to inform the general contractor of the agreement.  H & L reneged on its agreement and Damuth sued on the bond under the Miller Act.

The Court stated that, in failing to inform the general contractor and surety, Damuth participated in misleading the general and surety.  The Court found that, in light of H & L’s contractual and statutory obligation to pay Damuth from funds paid to it on the project, Damuth essentially agreed to accept payment under other terms in exchange for a promise not to “rat out” H & L.  This activity kept the General Contractor from being able to deal with the situation and therefore the surety did not have to pay.

The take away? Always be honest with everyone when making deals outside of the contractual chain.  I would advise that you, as a subcontractor or supplier, don’t make such deals on bonded projects or at the very least keep the general contractor and surety in the loop.  By keeping the general contractor and surety in the loop, you avoid looking like you are in on the scam and also give the surety a chance to protect itself by paying you or at worst having to pay you when you have to make a claim.

As always, I welcome your comments below.  Please subscribe to keep up with this and other Construction Law Musings.

© Construction Law Musings- Richmond, VA is licensed under a Creative Commons Attribution-No Derivative Works 3.0 U.S. license.

Here at Musings, we have discussed the topic of mechanic’s liens extensively.  However, a mechanic’s lien may not be appropriate depending on the type of project that you work on.  For instance, in Virginia (as in most states), a contractor cannot place a mechanic’s lien on a public project.

In Virginia, the legislature has adopted the “Little Miller Act,”modeled after its federal counterpart.  The Virginia Act requires that a contractor post both a payment and procurement bond on any public project valued at over $100,000.00.  These bonds secure just what you would think that they would, i. e. payment of subcontractors and performance of the work. The payment bond is a substitute for the lien rights that a subcontractor would have on a private project.

Essentially, the Little Miller Act allows a subcontractor or material supplier the right to collect under the bond if it has not been paid within 90 days of the date that the last material or labor was provided to a project. Once the subcontractor or material man shows that the labor or material was in fact provided, the claim is collectible absent some proof by the bonding company or contractor that it has some sort of payment defense (setoff, delay, etc.).

In order to take advantage of this powerful tool, you need only file a claim within a year of the last date of work/material supply if you are in direct contract with the general contractor.  If you are not in direct contract with the general contractor (or other party against whose bond you are claiming), you must send a notice to that party within 180 days of the last date of work.

This brief overview should give the basics of Virginia’s Little Miller Act.  As always, consult with a knowledgeable attorney when making any sort of construction claim.

If you find this helpful, please subscribe or comment below.  Also, feel free to contact me with any questions or other concerns you may have.

© Construction Law Musings- Richmond, VA is licensed under a Creative Commons Attribution-No Derivative Works 3.0 U.S. license.

Musings is back! And a great case for subcontractors on federal projects came out of the U. S. District Court for the Eastern District of Virginia last month.

The Court in U. S. ex rel Acoustical Concepts, Inc. v. Travelers Casualty and Surety Co. of America, et. al. held that, despite language in the General Contractor’s contract allowing set-off for obligations based upon “any other contract or agreement,” Miller Act claims are not subject to setoff based on non federal projects.

This is clearly good news for subcontractors on federal projects. The Eastern District ruling essentially states that the Miller Act and the standard Miller Act bond form trumps any private contractual language as it relates to non-federal projects. The Court did not go further and expand its ruling beyond non federal projects, but the Acoustical Concepts ruling adds another layer of protection on federal projects for subcontractors and suppliers that do not have the protection of mechanic’s lien rights because of the nature of the project.

I’d love to hear from sureties, subcontractors and general contractors for their perspective on this ruling.

Should you find this Musing interesting, please subscribe and join the conversation with a comment below.

© Construction Law Musings- Richmond, VA is licensed under a Creative Commons Attribution-No Derivative Works 3.0 U.S. license.

In Aarow v Travelers the Court looked at the interaction between a typical termination clause, a “pay when paid” clause, and the Miller Act.  The key facts are these.  The general contractor on the project at issue, Syska, did not get paid some disputed amounts by the owner and subsequently did not pay Aarow, the plaintiff and a subcontractor on the project.  Aarow then refused to continue work and was terminated by Syska who then took over the completion of the work.  Aarow sued, seeking damages for the value of its work prior to the termination.  Travellers, the surety defended stating that, if Aarow was properly terminated for cause by Syska, then Aarow was not entitled to payment under the contract until such time as the work was completed and accepted by the owner. The termination clauses are set out in the linked opinion.

The Court agreed with Travelers, stating that the pay when paid clause created a situation whereby Aarow could not stop work merely because of a non-payment by Syska attributed to non-payment by the owner.  The Court was clear in stating that the Miller Act trumps “pay when paid” in instances where the only cause for non-payment is non-payment by an owner.  The Court then reasoned that it is the interaction between the termination and “pay when paid” provisions, and not the “pay when paid” clause itself,  that exonerated Travelers because it created the default by Aarow due to its refusal to continue work. In short, Aarow was properly terminated for cause because it left the job without justification and therefore Travelers  was not liable.

What can we learn from this?  1.  A “pay when paid” clause, on its own, does not create a defense to a Miller Act claim; 2.  Read every line of a construction contract before you, as a subcontractor, leave a job site and refuse to come back; and 3.  The Miller Act does not completely absolve parties to a contract from the terms of that contract.

In sum, the careful reading of your construction documents and the advice of a construction lawyer before making a big decision like leaving a job site can go a long way toward a successful collection action under the Miller Act.

As always, I welcome your comments below.  Please subscribe to keep up with this and other Construction Law Musings.

© Construction Law Musings- Richmond, VA is licensed under a Creative Commons Attribution-No Derivative Works 3.0 U.S. license.

This week’s Guest Post Friday is a bit different.  This time, I get to “muse” at @andreagoldman’s Massachusetts Builders Blog.  Andrea gave me the great opportunity to talk about the Miller Act.  Here’s an exerpt:

Federal and State government work are a growth area in construction these days. With the economy in a downturn (though possibly turning around according to ENR), government projects are even more desirable for commercial contractors.

With this trend toward government contracting, becoming the lowest bidder and squeezing your margins is a big temptation, or even necessity. Along with this lower margin comes higher risk.

However, one saving grace for contractors on Federal projects is the Miller Act. Essentially, the Miller Act was created because contractors cannot put a mechanic’s lien on federal government property. It requires that all projects with a contract value over $100,000.00 have a payment and performance bond, provided by the general contractor.

For the rest of my thoughts, click here.

Thanks again to Andrea for the opportunity.  I recommend her blog highly.

As always, please join the conversation with a comment below.  Also, please subscribe to keep up with this and other Construction Law Musings.

© Construction Law Musings- Richmond, VA is licensed under a Creative Commons Attribution-No Derivative Works 3.0 U.S. license.

As always, please don’t hesitate to comment.  Also, please subscribe to keep up with the latest Construction Law Musings.

© Construction Law Musings- Richmond, VA is licensed under a Creative Commons Attribution-No Derivative Works 3.0 U.S. license.