On all public projects, general contractors are obligated by statute to procure payment bonds and on many high-end private projects, these same general contractors are contractually obligated to procure payment bonds. A payment bond is a surety bond issued to contractors that guarantees that the contractor will pay their subcontractors, material suppliers and laborers in a timely fashion. 

Payment bonds are usually obtained by contractors or subcontractors prior to the commencement of a construction project. While payment bonds are intended to provide the necessary guarantee/protection for subcontractors who are performing work on a project, but not being paid by the general contractor or first tier subcontractor, these bonds are just like any other contract. 

This means that if the claimant does not comply with the exact language of the payment bond, the surety company that issued the payment bond can deny the claim on the basis the terms and conditions of the payment bond were not complied with. Equally important is the fact that the payment bond usually contains language which shortens the time that once can commence a lawsuit against the surety. 

While a contractor has six years to sue for breach of contract under payment bonds, many times the time to file a lawsuit against the surety is shortened to one year. The key to understand payments bonds can be summed up in four letters: RTFB (Read the Freakin' Bond).

Before any contract of more than $100,000 is awarded for the construction of public building or other public work, a payment bond must be furnished. For federal projects, the payment bond is known as the Federal Miller Act Bond. The Miller Act does not require that first-tier claimants (i.e., entities who are direct subcontractors with the general contractor) give notice prior to filing suit. 

However, second-tier claimants who have a direct relationship with the subcontractor, but not with the prime contractor, must give written notice to the prime contractor within 90 days from the date on which the claimant provided the last of the labor and material for which the claim is made prior to filing a suit under the Miller Act payment bond. If the second-tier contractor does not give written notice, and should they file a lawsuit in the future, it will likely be dismissed for failure to comply with the Miller Act. Under the Miller Act, an action must be brought no later than one year after the day on which the last of the labor was performed or material supplied by the company bringing the action. 

General contractors who perform public work are generally aware of Miller Act payment bonds, but the issue of notice by second-tier claimant can be challenging. On public projects, payments are generally slower than private projects and payment may be 60-90 days after requisition is submitted. Thus, it can become difficult for a second-tier claimant to file the notice of claim within 90 days because this second-tier claimant, in the scheme of a private project, may not get paid well after the 90-day period. The Miller Act notice provision leaves no room for interpretation nor does it care that by complying with the notice provision a payment bond claimant may be ruining its business relationship with its principal. The bottom line is one who fails to comply with the notice provision will have its claim dismissed by a Court for failure to comply with notice provision in the payment bond.

A “Little Miller Act” is a state statute, based upon the Federal Miller Act, that requires prime contractors on a state construction projects to post bonds guarantying the performance of their contractual duties and/or the payment of their subcontractors and material suppliers. The payment bonds ensure payment to subcontractors and suppliers performing work or supplying materials to the project. Subcontractors on state and local procurements need to know the requirements of these Little Miller Acts to protect themselves in the event they are not paid for their work. Prime contractors, too, need to understand the Little Miller Acts if they are to defend against claims on their bonds, either on procedural grounds—most often when claims are untimely filed—or on the merits of the claim.

The most important requirements of the Little Miller Act are the different notice requirements between jurisdictions. Both prime contractors and subcontractors alike will face differing notice requirements under these acts. In some jurisdictions, prime contractors must provide upfront notice to subcontractors and suppliers of the bond. For example, in Georgia, a prime contractor furnishing a payment bond must file a notice of commencement of work with the clerk of the superior court of the county in which the work is being performed. The prime contractor must also supply a copy of the notice of commencement to any subcontractor that makes a written request.

Potential claimants must pay careful attention to the notice provisions that they must comply with to be able to pursue legal action on the bond. First, the time frame in which a claimant has to file a claim on a bond will vary significantly depending on the jurisdiction. In Illinois, for example, a claimant must file notice of the bond claim within 180 days of the date on which the last item of work was performed. In comparison, New Mexico’s notice requirements vary with the claimant’s position in the chain of contracts. For subcontractors at the second tier and below, notice must be provided to the contractor within 90 days of the last date on which work was performed.

Contractors should keep in mind that the notice requirements of each Little Miller Act are different than the statutes of limitation for filing an action in court. The notice provisions constrain the amount of time that a potential claimant can wait to provide notice of nonpayment to the prime contractor and surety. A statute of limitation sets the deadline for filing the lawsuit to enforce the bond claim. In some states, the claimant must file suit to enforce its payment bond claim within a specific time period after making the bond claim. For example, in New Hampshire, the suit must be filed within one year of making the bond claim. Compare that to the District of Columbia where the suit must be filed within one year of the last date on which work was performed. 

In each state, Little Miller Acts control the bond rights for contractors working on public projects. But no two states’ Little Miller Acts are the same. They all differ in often small but always significant ways. Failure to understand these differences can have important consequences for all contractors working on public projects, whether they are prime contractors, first-tier subcontractors, subcontractors farther down the tiers of a job, or suppliers at any level. As a best practice, at the beginning of each project, each contractor should review the nuances of the applicable Little Miller Act, particularly if they often perform jobs in various states.

The two most common private project payment bonds are the AIA311 Payment Bond and the AIA312 Payment Bond (1984 and 2010 versions). The AIA A311 provides that the time for the claimant to file a lawsuit must be within one year from when the principal on the bond last worked—not from when the claimant last worked. Invariably, that bond form gives the claimant more time to file a claim because of the use of a different trigger date. For example, if the claimant installed windows on Jan. 1, 2020, but the principal (i.e. general contractor) did not complete its work until July 1, 2020, the claimant’s time to file a lawsuit under the payment commenced on July 1. 

The AIA A312 bond form, created ostensibly to replace the A311 (which is still in use), has a number of very specific notice requirements that have to be met in order to have coverage for the claim. Under the AIA A312 a claimant may not commence suit after expiration of one year from the date on which the claimant gave notice of the claim or on which the last labor or service was performed by anyone or the last materials or equipment were furnished by anyone under the construction contract whichever occurs first.

For most contractors, the day-to-day grind on a complex public or private construction project is grueling and stressful. Knowing the exact terms of the payment bond that protects these same contractors is also grueling and stressful. In the end, however, being informed at the beginning of a project will provide the contractor with the knowledge of when notice needs to be given and when a lawsuit against the surety needs to commence.