Chapter 12 - § 12.3 • PAYMENT BONDS
| Jurisdiction | Colorado |
§ 12.3.1-Bond Types
Payment bonds are mandated on virtually all public works projects. They are typically issued in tandem with performance bonds, each with separate face amounts and distinctly different terms and conditions.9 Occasionally, a project owner may specify a "performance and payment bond," which combines the conditions of both bond types in a single document with only one face amount. This is not a good practice, however, because it creates the possibility that there will be insufficient funds under the bond to both finish a defaulted project and pay all the subcontractors and suppliers.
Miller Act Payment Bonds
The Miller Act relates to the construction, alteration, or repair of a public building or public work of the United States. A "public work" may include any project belonging to the United States or constructed for public use at the expense of the United States.10 Payment and performance bonds are required on all federal contracts for the construction, alteration, or repair of public works in amounts exceeding $100,000." The Miller Act is limited to federal projects and has no application to projects owned by the state, counties, cities, special districts, or other state governmental subdivisions.
Miller Act payment bonds are issued on standard forms approved by the federal government. A sample Miller Act payment bond form is reprinted at Exhibit 12B. Generally, the terms and conditions of Miller Act payment bonds are very similar. Nevertheless, it is helpful to get a copy of the bond in question, particularly if ownership or control of the project is uncertain or if information is needed to contact the surety. A federal facility such as Rocky Flats may be owned by the federal government, but operated by a private contractor. Construction projects awarded by the federally owned facility will require compliance with the Miller Act, but the form may vary slightly. A copy of the payment bond issued for a specific federal project may be obtained by writing the department or agency head, or the secretary of the contracting governmental agency, accompanied by an affidavit of non-payment.12
If a subcontractor on a federal public works project is not paid, the Miller Act may be the subcontractor's only adequate remedy. Common law does not adequately protect labor and material suppliers to federal public works projects.13 Mechanics' liens cannot be filed on U.S. government property. If a subcontractor's Miller Act claim against a surety fails, recovery may still be available against the prime contractor on a quantum meruit theory.14 A supplier of labor and material is not barred from enforcing direct contractual rights, regardless of whether he or she chooses to proceed against the surety. A claimant may also elect to waive Miller Act rights and proceed under a dispute resolution clause.15
The Miller Act16 was amended by the Construction Industry Payment Protection Act of 199917 to eliminate a provision that permitted the penal sum of a Miller Act payment bond to be less than 50 percent of the contract price on any contract exceeding $1 million. Under the amendment, a payment bond cannot be less than the amount of the performance bond and must be equal to the contract amount, unless the contracting officer makes specific written findings that the amount would be impractical.
In addition, the Miller Act was amended by the Construction Industry Payment Protection Act of 1999 to add a new subsection § 270b(c) (now 40 U.S.C. § 3133(c)), which prevents a supplier from relinquishing Miller Act rights prior to performance or delivery of materials. Under this subsection (c), any waiver of payment bond rights is void unless it is in writing, signed, and executed after the covered labor or material has been furnished.
Colorado Public Works Act Payment Bonds
With the exception of state projects,18 the Colorado Public Works Act mandates surety bonds on all public works contracts over $50,000. Public entities have the discretion to require payment and performance bonds on contracts under that amount.19 The Act applies to all contracts awarded by the state, counties, cities, municipalities, school districts, and other "political subdivision[s] of the state" for the "construction, erection, repair, maintenance, or improvement of any building, road, bridge, viaduct, tunnel, excavation, or other public works."20 Under §§ 105 and 106 of the Act, boards of county commissioners, trustees of towns, and district school boards are expressly included.21 Other public entities, such as hospital districts, are also covered by the Act.22 A sample Colorado Public Works Act Payment Bond form can be found at Exhibit 12C to this chapter.
Since the Colorado Mechanics' Lien Act has no application to projects constructed by governmental agencies, the Colorado Public Works Act is the sole form of financial security available to suppliers on public projects.23 C.R.S. §§ 38-26-105 through -107 stand in lieu of the Mechanics' Lien Act. Under the Colorado Public Works Act, suppliers have a direct right of action against the general contractor's payment bond surety. They also have a right to claim a lien on contract funds retained by the public entity from the general contractor until the public entity receives documentation that all suppliers have been paid. Supplier rights to assert a bond claim on one hand and to establish a lien on contract funds on the other are entirely independent. Thus, a claimant who fails to perfect a lien on funds is not barred from maintaining an action on the labor and material payment bond and vice versa.24
Under the structure of the Colorado Public Works Act, the public entity should be in possession of the original payment and performance bonds tendered by the general contractor. Since the terms and conditions of public works bonds have not been standardized, it is always good practice for a claimant's attorney to request a copy of the payment and performance bonds from the public entity. Since the bonds are public records and the contracting public entity has no reason to refuse the request, practitioners should expect full cooperation. The state is required to provide a copy of the bond upon request.25 If an informal request is not productive, a request for the bonds should be made through the Colorado Open Records Act.26
The public works acts of other states are sometime referred to as "Little Miller Acts" since their coverages, logistics, and time-bars are similar to federal law. Given the major structural differences between the Miller Act and Colorado's Public Works Act, use of the term "Little Miller Act" in Colorado can be misleading and should be avoided.
Private Project Payment Bonds
A supplier's right to assert a mechanics' lien on a private project is governed by the mechanics' lien statute,27 not the payment bond. The payment bond surety is an alternative source of payment. The payment bond will only become the exclusive remedy if mechanics' lien rights are unenforceable.
The specific payment bond form that must be tendered by the contractor is usually prepared by the owner's design professional and included in the bid package. If a payment bond form is not specified, the surety will issue the bond on the form it prefers, subject to acceptance and approval by the owner. The current American Institute of Architects (AIA) Document A312 payment bond form is reprinted in Appendix A to this book. The older and less complicated A311 payment bond form remains popular in Colorado and is the basis of many scripted payment bonds.28
Mechanics' lien rights and remedies must be preserved while investigating the possibility of bond coverage. Most private construction projects are not bonded. If the existence of a payment bond turns out to be a rumor, or if the payment bond is a "sole obligee instrument" that prohibits third-party claims, a mechanics' lien may be the only viable remedy. Pursuing lien rights tends to be beneficial since the statutory notice that is required to perfect a mechanics' lien may also fulfill common requirements in private bond forms for notice to the general contractor.
If the existence of a payment bond is verified, the unpaid supplier may be able to avoid a mechanics' lien foreclosure action. Typical private payment bonds provide a direct right of action against the surety without filing a mechanics' lien action or commencing suit against the owner.
In seeking to verify the existence of a bond or to obtain a copy, it is best to ask the owner. Bond principals will usually tender the required final bonds to the owner prior to the issuance of a notice to proceed. The project owner should be willing to provide claimants with a copy of the payment bond since the bond protects the owner against lien claims. On the other hand, a bonded contractor has little incentive to disclose the existence of a payment bond because the information is likely to result in a bond claim and trigger demands by the contractor's surety under the indemnity agreement. Unresolved claims against the contractor's surety, among other things, could also impair the contractor's ability to obtain future bonding.
§ 12.3.2-Contractual Relationships Covered by Payment Bonds
The Miller Act
Suppliers who have a direct contractual relationship with a Miller Act prime contractor are expressly within the scope of a Miller Act bond.29 Coverage is also clear when a supplier has a direct contractual relationship with a subcontractor of the bonded contractor. Coverage becomes less clear, however, when there is no contract between the claimant and either the prime contractor or a subcontractor. A contractual relationship with at least a "subcontractor"30 is a minimum prerequisite to recovery against a Miller Act payment bond.31 Therefore, materialmen and sub-subcontractors dealing directly with subcontractors of the prime are covered. A materialman to a materialman, on the other hand, is not covered...
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