Chapter 5 - § 5.3 SURETY REQUIREMENTS

• Jurisdiction: Colorado

§ 5.3 SURETY REQUIREMENTS

Under the Miller Act, contractors¹⁴ awarded a contract of more than $100,000 for the construction, alteration, or repair of any public building or public work of the Federal Government must furnish both performance and payment bonds.¹⁵ A performance bond is a conditional obligation, which is triggered by the substantial performance of the obligee, typically the owner, under the contract and the principal's material breach that is substantial enough to warrant termination.¹⁶ In other words, the purpose of a performance bond is to protect a project owner (i.e., the U.S. Government) from the nonperformance of contractors. Due to the protection provided, contractors must obtain bonds using a specified Miller Act performance bond form, an example of which is provided at the end of this chapter.¹⁷ The scope of monetary protection provided by a performance bond is broad as it must provide coverage for taxes paid on wages that the contractor pays in carrying out the contract.¹⁸ A prerequisite to a claim under a performance bond being made is that the obligee (the project owner [U.S. Government]) provide proper notice to the bond principal (the prime contractor) and surety (the entity issuing the bond) of a breach.¹⁹ That is the obligee (the claimant under a performance bond), must provide notice to the prime contractor for any nonperformance or nonpayment of required taxes. Specifically, a claimant must give the surety written notice regarding any taxes that remain unpaid for an attributable time period of the project either within 90 days after the contractor files a return for that period or within 180 days from the date when a return for the period was required to be filed.²⁰ Prior to bringing a civil action on the bond for taxes, a claimant must provide notice and wait "more than one year after the day on which notice is given."²¹

A payment bond is the second required bond on federal projects under the Miller Act.²² Similar to a performance bond, a payment bond is a conditional obligation based on the following: (1) the claimant providing proper and timely notice, claim documentation, and commencing suit in conformity with the terms of the bond; (2) the claimant's proof of entitlement to recovery under the bond; and (3) the absence of contractual or statutory defenses that otherwise preclude entitlement. ²³ In contrast with a performance bond, the purpose of a payment bond is to provide additional payment protection to subcontractors...