Payment Bonds
Chapter 16
Payment Bonds
When subcontractors or suppliers are not paid for the labor and services they have provided to a construction project, they may be able to recover payment by making claims on a payment bond, if the contractor provided one for the project. A payment bond is an agreement between a contractor and a surety by which the surety guarantees payment for the labor and materials contracted for and used by the contractor on a particular project. Payment bonds have long been required by statute for public construction projects and frequently are mandated in private construction contracts.1 When the owner—whether a governmental or private entity—requires a payment bond, the contractor obtains a payment bond from a surety and furnishes the bond to the owner.
Payment bonds required on federal, state, or local government construction projects are governed by statute.2 The most influential such statute is the federal Miller Act, 40 U.S.C. §§ 3131–3134 (the “Miller Act”), which governs payment bonds on federal government construction projects. Payment bonds on private projects are essentially private contractual undertakings governed by the terms of the bond itself. Whether statutory or private (common law bonds), payment bonds are generally subject to notice and timing requirements relating to claims and litigation. Potential claimants must comply with such requirements or risk waiving otherwise valid claims.
In exchange for providing a payment bond, the surety typically requires contractors or their principals to enter into agreements to indemnify the surety for any amounts paid for claims as well as expenses incurred in evaluating and paying or defending claims, including expert fees and attorneys’ fees and expenses. The principal may be required to compensate the surety for its expenses even if the surety neither pays nor litigates payment bond claims arising on the project. The principal may also be required to pay the surety’s expenses to recover those underlying expert fees and expenses from the principal.3
This chapter examines the scope of protection offered by statutory and private payment bonds: which project participants may recover; which types of work are covered; and whether and to what extent delay damages, extra work, and other costs qualify for payment bond coverage. The chapter differentiates between performance bond claims and payment bond claims and addresses the relationship between payment bond claims and lien rights. Finally, the chapter explores the defenses to payment available to payment bond sureties: timeliness of notice, timeliness of lawsuit, misrepresented status of payments, and claim or lien waivers.
I. Payment Bonds Required by Statute
A. The Miller Act
The most influential statute governing payment bonds is the federal Miller Act, which requires:
[b]efore any contract of more than $100,000 is awarded for the construction, alteration, or repair of any public building or public work of the Federal Government, a person must furnish to the Government…[a] payment bond…for the protection of all persons supplying labor and material in carrying out the work provided for in the contract.4
Accordingly, a general contractor entering into a public building or public works contract with the federal government must furnish a payment bond in an amount equal to the contract price, unless the contracting officer determines that it is impractical to obtain a bond in that amount and specifies an alternative bond amount.5
Miller Act payment bonds guarantee payment to covered subcontractors and suppliers supplying labor and materials to contractors or subcontractors engaged in the construction, alteration, or repair of any public building or public work of the United States so long as certain deadlines are met. A payment bond may provide the only remedy—a right of recovery against the surety issuing the payment bond—available to unpaid subcontractors and material suppliers on federal government projects if the claimant’s customer does not and cannot pay. However, if the contractor fails to furnish a payment bond where one should have been required under the Miller Act, would-be bond claimants have no recourse against the government.6
To establish a Miller claim, the claimant must show that: (1) it supplied labor and materials for work in the particular contract at issue; (2) it is unpaid; (3) it had a good faith belief that the materials were for the specified work; and (4) jurisdictional requirements are met.7
Statutory payment bonds for federal, state, and local public projects generally provide subcontractors and suppliers on those projects with the same type of protection available to them on private construction projects under applicable state lien laws.8 In most states, when subcontractors or material suppliers on a private construction project are not paid for the work or materials they provided, they have the right under state law to file a mechanics’ (or materialmen’s) lien on the property. By filing a lien on the property, they reserve their rights to collect unpaid sums from the property owner. They also may have protection under a payment bond. Federal property, however, is not subject to legal or equitable liens, and the Miller Act is designed to provide an alternative remedy to the mechanics’ liens ordinarily available on private construction projects.9
1. Factors Used to Determine Whether the Miller Act Applies
When a contractor has provided a payment bond for a project, but the parties disagree about whether the Miller Act applies, courts must determine whether the bond is a Miller Act payment bond.10 The Miller Act provides no rights of action on common law bonds (i.e., those furnished pursuant to private contractual arrangements) or state law bonds.11 Whether a payment bond is governed by the Miller Act is important to lower-level subcontractors and suppliers, who may have rights under the Miller Act but not under the terms of the bond itself.12
Whether the Miller Act applies to a given payment bond is not determined by the bond’s title.13 Rather, courts look to the underlying contract and circumstances related to the bond to determine whether it should be treated as a Miller Act bond. The Miller Act applies to payment bonds:
- Related to contracts for the “construction, alteration, or repair” of federal buildings or federal public works, and not for services
- Where the solicitation for bids characterized the contract as a “construction, alteration, or repair” contract or mentioned the Miller Act
- Where the bond was furnished to the United States, or one of its agencies, and not a higher-level subcontractor
- Where the project is owned by the United States, or one of its agencies, not a private, state, or local government entity
The Miller Act applies to contracts for “construction, alteration, or repair” of public buildings or works but not to “service contracts.”14 Distinguishing between service contracts and Miller Act contracts on the basis of the work being contracted for is not always straightforward; the language the contracting officer used in the solicitation for bids—rather than the work itself—is often determinative. For example, a solicitation for bids on a contract for the installation of a telephone switching system at an Army depot initially required Miller Act bonds; the contracting officer later amended the solicitation to treat the subject as a “services contract.” The contracting officer’s determination that the contract was for “services” stood.15
The terms of the contract between the contractor and the federal agency may include determinative language for the payment bond. If the contract mentions the Miller Act specifically, the Miller Act probably applies. An agreement to comply with applicable federal law “in connection with the performance of the contract,” however, is not specific enough to implicate the Miller Act.16
Where a contract for debris removal after Hurricane Katrina did not mention the Miller Act but did incorporate provisions of the Service Contract Act, the court found that it was a services contract and the Miller Act did not apply to the payment bonds on the project.17 This ruling was consistent with the language of the Miller Act, in that “construction, alteration, or removal” of a public building or public work does not seem to implicate “debris removal.”18 The court analogized hurricane debris removal contracts to contracts solely for the demolition of federal buildings, which do not fall within the ambit of the Miller Act.19
2. Is the Contract One for the Construction, Alteration, or Repair of “Public Buildings” and “Public Works”?
When deciding whether the Miller Act applies to a given contract, a key question is whether the contract constitutes construction or alteration of a “public building or public work of the United States.”20 Courts have been left to define and apply the terms “construction, alteration, or repair,” “public buildings,” and “public works,” because the statute is silent on these terms. Some courts have held that debris removal and demolition contracts are not subject to the Miller Act. In contrast, other courts have established that contracts for a broad variety of other undertakings that may not seem to involve “any public building or public work” were covered under the statute. Contracts for the design, construction, and repair of vessels,21 building a highway,22 and raising a sunken towboat from a canal23 all have been judged subject to the Miller Act. Considering how broadly courts have defined “public works,” cases rarely turn on that definition.
Instead, whether the Miller Act applies often turns on whether the project is sufficiently “federal.” Most courts have concluded that federal funding alone is not enough to make a project a federal public work, which would bring a project into the purview of the Miller Act.24 For the Miller Act to apply, the United States, or one of its agents or agencies, must have contracted for the work in question,25 and the payment bond must have been furnished directly to the United States or one of its agents or agencies, and not a contractor or nonfederal agency.26
For example, a court examining whether a contract for the construction of a pedestrian tunnel at the Washington Reagan National Airport was subject to the Miller Act focused on whether the contracting agency was part of the federal government. Although the contract was federally funded, the Miller Act did not apply because the contracting agency was a political subdivision created by state statute, independent of the federal government, and the project was not a “public work of the United States.”27
When the Miller Act requires a prime contractor to furnish a payment bond to the contracting officer, that prime contractor may also require its subcontractors to furnish payment bonds. Depending on many factors, the subcontractors may or may not provide payment bonds. If so, the subcontractor submits its payment bond to the prime contractor, not to the contracting officer. Accordingly, the payment bond the subcontractor furnishes to the prime contractor on a federal government construction project is not a Miller Act payment bond, but rather a private (common law) bond, even though the project is a “public work.”28
B. Little Miller Acts
Many states have enacted statutes requiring and governing payment bonds for certain state and local government construction projects. These statutes, often known as “Little Miller Acts,” usually follow the policies and procedures of the federal Miller Act.29 Little Miller Acts, like the federal version, are viewed as remedial statutes, and bonds provided pursuant to these statutes generally are construed liberally in favor of claimants.30
Although decisions interpreting the federal act are not binding on a court’s interpretation of a state’s “Little Miller Act,” they do provide persuasive authority.31 Where such a state statute is patterned after the Miller Act, state courts often look to federal case law interpreting the Miller Act to aid in interpretation of the state statute.32 Keep in mind, however, that decisions of federal courts and the sundry state courts can be inconsistent. Many Little Miller Acts define more terms than the federal Miller Act does. Also, some state laws contain slightly different terms from the federal Miller Act, which can lead to different results. When a statutory definition conflicts with a definition from federal case law, the statutory definition prevails. Most importantly, since statutory terms are incorporated by law into public works bonds, familiarity with a state’s specific requirements regarding payment bond recovery is essential to ensure that a claimant does not lose any of its bond rights.
In some states, when a contractor has failed to furnish a payment bond in violation of a statute requiring one, a subcontractor or supplier may obtain some relief from the public body, unlike a subcontractor or supplier on a federal government contract in the same situation. Under Georgia law, for example, a government agency is statutorily liable to claimants for failing to obtain a required payment bond.33
Also, absent such a statutory provision, a subcontractor or supplier may be able to recover from the governmental agency on a theory that the agency negligently failed to enforce the statutory requirements, which proximately caused the subcontractor’s inability to recover from the payment bond surety.34 In Sloan Constr. Corp. v. Southco Grassing, Inc., the South Carolina Supreme Court held that a statute requiring payment bonds on public projects “gives rise to a private right of action against a government entity for failure to ensure that a contractor is properly bonded.”35 Furthermore, “a government agency’s failure to secure and maintain statutory bonding as required by the [relevant statute] gives rise to a third-party beneficiary breach of contract action by a subcontractor.”36 Thus, a subcontractor may bring an action both in tort—for negligence—and in contract against the government based on its failure to comply with, or ensure the prime contractor complied with, the statutory payment bond requirements.37 The South Carolina Supreme Court chided the lower court—which denied redress for the subcontractor on either theory—for analyzing the case under federal Miller Act rubric. The court found that the statute in question had not been characterized as a Little Miller Act, did not appear to be patterned after the Miller Act, and indeed provided stronger payment protection than the Miller Act.
Other jurisdictions, however, will deny recovery in spite of the public body’s failure to require the mandated bond.38 The outcome may depend on whether the contracting body is shielded by sovereign immunity.
II. Payment Bonds on Private Projects
Private owners may require contractors to provide payment bonds.39 Some states have enacted legislation governing these private payment bonds. Massachusetts, for example, enacted a statute stating that any person who furnishes labor or materials to a project is entitled to recover against the private payment bond on the project, if any, without proving reliance on the bond.40 Other states have enacted statutes outlining the requirements a private payment bond must meet to shield the project owner from mechanics’ liens.41 In Texas, if a private payment bond meets the statutory requirements, a claimant must look to the surety as the presence of the bond negates any lien rights against the property owner.42 Similarly, under Florida law, a private owner may exempt its real property from construction liens by requiring the contractor to furnish a statutory payment bond.43 Generally, states that have not enacted such statutes consider payment bonds on private projects “common law” bonds, which are governed by standard contract law principles.44
III. Who Is Protected by Payment Bonds
To qualify for coverage—that is, the right to recover under a payment bond—a potential claimant must show that it is within the protected class of entities subject to the bond law or the bond terms. For example, under the Miller Act, only subcontractors and suppliers providing labor or materials directly to the general contractor or to a first-tier subcontractor are covered by the bond protection.45 In contrast, Little Miller Acts may apply that protection to all subcontractors and suppliers,46 or be as limited in extent as the federal Miller Act.47 State and local public project bonds by their terms may also provide coverage beyond statutory limitations.48 For private bonds, the scope of covered classes of subcontractors and suppliers is generally governed by the terms of the bond.49
The potential claimant also generally must show that it supplied labor or materials to the project with a good-faith belief that the labor or materials were intended for the work as provided in the contract and that it has not been paid.50
A. “Subcontractors” and “Suppliers”
The language of the Miller Act—“all persons supplying work and materials in the prosecution of the work”—is misleading in its broadness. The Miller Act does not cover every party that supplies labor or services remotely connected to the project or all materials that eventually end up in the project. Many parties contribute to the progress of a given project, but not all of them are sufficiently close to the contractor that obtained and furnished the payment bond to recover under that bond.
The United States Supreme Court has identified two tiers of claimants entitled to protection under the federal Miller Act.51 The first tier comprises the subcontractors and suppliers (also known as materialmen) that contracted directly with the prime contractor. The second tier comprises the subcontractors and suppliers that contracted with a first-tier subcontractor but not those who contracted with a first-tier supplier; suppliers to suppliers are not covered under the Miller Act.52 In other words, only those parties that have direct relationships with the prime contractor or a first-tier subcontractor may recover on Miller Act payment bonds.53
Whether a first-tier entity is considered a subcontractor or a supplier can be critical to determining whether the Miller Act covers suppliers to that first-tier entity. For example, in United States ex rel. E & H Steel Corp. v. C. Pyramid Enters., Inc., the court first focused on whether the first-tier entity with whom the supplier had contracted was a supplier or a subcontractor to determine whether a supplier was covered under a Miller Act bond.54 The court decided that the first-tier entity was a subcontractor, meaning its supplier was covered by the payment bond.
When determining whether a party should be considered a supplier or a subcontractor under the Miller Act, many federal courts apply a balancing test and favor finding a “subcontractor” relationship when the party in question has assumed a “significant and definable part of the construction project.”55 Other factors include: whether a payment or performance bond was required of the first-tier subcontractor, whether the price included sales tax, whether progress payments and retainage were withheld, and whether shop drawings and certified payrolls were submitted.56
The definition and scope of the term “subcontractor” varies among the Little Miller Acts, and many of those laws include statutory definitions of terms left undefined in the Miller Act. Coverage under the Little Miller Acts may be broader than under the federal Miller Act.57 When distinguishing between suppliers and subcontractors, state courts may consider whether the claimant is considered a subcontractor or a supplier by the custom of the trade, or whether the claimant’s performance satisfied a substantial and definite portion of the prime contract.58 Other states require a claimant’s work to have been completed at the construction site for that claimant to qualify as a subcontractor.59 But where no statutory definition applies and no state law exists on the subject, state courts will often apply the definition of “subcontractor” developed by federal courts under the Miller Act.60
B. Suppliers of Customized Materials
Although a party that merely supplies materials probably will fail to qualify as a subcontractor, specialty firms that provide customized materials may be considered subcontractors for federal Miller Act purposes. Courts consider whether the materials were designed or fabricated specially for the project and whether they have commercial value outside the particular project.61 A supplier of customized materials may qualify as a “subcontractor” even if those materials were not incorporated into the project, so long as they were “specially fabricated” for the project.62 In a case where a supplier had design responsibility, prepared shop drawings, and alleged that it manufactured custom conduit for the project, the court found that it was not a “subcontractor.”63 The court held “that the coating, cutting and threading operations” of the conduit did “not constitute custom manufacturing.”64
C. “Substantiality and Importance” of Relationship with Prime Contractor
Before lower courts developed the preceding factors, the United States Supreme Court held that whether an entity is a supplier or a subcontractor depends on “the substantiality and importance of his relationship with the prime contractor.”65 In F.D. Rich Co., Inc. v. United States ex rel. Industrial Lumber Co., the Supreme Court applied the “substantiality and importance” test and held that a firm providing plywood sheets—that were not unique or customized—was a subcontractor for the purposes of the Miller Act.66 The decision was based on the strength of the firm’s relationship with the prime. Under this approach, almost any first-tier supplier would qualify as a “subcontractor” for the purposes of the Miller Act. The outcome could have been different if the Court had applied the factors that lower courts have developed in the years since F.D. Rich was decided.
Noting this disparity, some courts recently have eschewed the factors in favor of returning to the Supreme Court’s broad “substantiality and importance” test.67 In one such case, United States ex rel. E & H Steel Corp. v. C. Pyramid Enters., Inc., the court of appeals overruled a lower court’s determination that a steel fabricator was a “supplier,” holding instead that it was a “subcontractor” because it had a contract with the prime contractor.68 The lower court’s determination was based on a number of factors, including the non-specialized nature of the material the steel fabricator supplied. The lower court’s ruling that the steel fabricator was a supplier foreclosed recovery on the payment bond for its suppliers (because a supplier’s suppliers are not covered). The court of appeals, overturning the lower court and holding that the steel fabricator was a subcontractor, warned against overly emphasizing the nature of the materials and the “laundry list” of factors listed earlier.69 In the words of the court, “[a]lthough furnishing customized or complex material may in some cases be a helpful indication of the strength of the supplier’s relationship with the prime contractor, it does not follow that the absence of such characteristics in the material supplied establishes a lack of ‘subcontractor’ status.”70
D. “Dummy” Subcontractors, Alter Egos, and Joint Ventures
Some courts have ruled that the Miller Act or applicable Little Miller Act does not permit contractors to manipulate recovery under a payment bond by telescoping or creating alter egos or joint ventures to enter subcontracts. A prime contractor will not be allowed to insert a dummy subcontractor between itself and actual performing subcontractors simply to avoid payment bond liability.71 When subcontractors or suppliers go unpaid by a dummy subcontractor, they still may be able to sue on the payment bond, as if they were in contract directly with the dummy’s parent company.72
The question of whether a “subcontractor” is an alter ego can be fact intensive and a claimant needs to be prepared to show sufficient inter-relationships between the contractor and the purported subcontractor to establish the alter ego relationship. For example, in Gateco, Inc. v. Safeco Ins. Company of America, the court did not find a dummy or alter ego relationship for a Little Miller Act claim even where surety had treated the two entities as one in prior dealings (though not in regard to the claims in that case) and the two entities shared an address, some employees, and equipment.73
Moreover, a prime contractor will not be allowed to create Miller Act liability by failing to pay itself, that is, by failing to pay a subcontractor that is actually its own alter ego or joint venturer. The Miller Act was not designed to protect the contractors furnishing payment bonds, and thus, a prime contractor’s partner or joint venturer is not protected by the Miller Act.74 As one court has said, “[i]n sum, payment and performance bonds do not cover an entity controlled by the same person that controls the principal named in the bond or [that controls an entity that] has otherwise agreed to indemnify the surety.”75
E. Claimants on Private Payment Bonds
The payment bond form used frequently on private projects, as well as on many state and local public works, is the American Institute of Architects’ (AIA) Document A312-2010, which defines a “Claimant” as:
An individual or entity having a direct contract with the Contractor or with a subcontractor of the Contractor to furnish labor, materials or equipment for use in the performance of the Construction Contract. The term Claimant also includes any individual or entity that has rightfully asserted a claim under an applicable mechanic’s lien or similar statute against the real property upon which the Project is located. The intent of this Bond shall be to include without limitation in the terms “labor, materials or equipment” that part of water, gas, power, light, heat, oil, gasoline, telephone service or rental equipment used in the Construction Contract, architectural and engineering services required for performance of the work of the Contractor and the Contractor’s subcontractors, and all other items for which a mechanic’s lien may be asserted in the jurisdiction where the labor, materials or equipment were furnished.
This definition may be broader than the AIA’s predecessor bond, AIA A312 (1984 ed.) depending on the applicable state law. The 1984 version limited claimants down to the second tier. The 2010 version also encompasses subcontractors and suppliers covered by local lien laws, which can include subcontractors and suppliers below the second-tier level.76
The Engineer’s Joint Committee on Construction and Design Documents (EJCDC) payment bond form C-615 (2010 ed. and 2013 ed.) contains the same definition of “Claimant” as the AIA A312-2010. The definition in the current EJCDC forms is an expansion of the definition of “Claimant” found in the 2002 edition of C-615.
Similar to the concepts applied under the Miller Act, ConsensusDocs 261 (© 2007, Revised 2011) defines a claimant as “an individual or entity having a direct contract with the Contractor or having a contract with a subcontractor having a direct contract with the Contractor to furnish labor, materials or equipment for use in the performance of the Contract.”77
Thus, the AIA and EJCDC payment bonds can cover a broader range of subcontractors and suppliers than the ConsensusDocs bond form in those states where lien rights extend beyond suppliers and subcontractors to first-tier subcontractors. The ConsensusDocs bond coverage of subcontractors and suppliers is more in line with the more limited scope of the federal Miller Act payment bond coverage.
IV. Work Qualifying for Payment Bond Coverage
A. Labor and Materials
After determining whether a given entity is protected by a payment bond, the next step is to determine if that entity’s work qualifies for protection. The Miller Act affords payment protection for “labor and materials” provided “in the prosecution of the work,” but it does not define those terms.78 Courts have defined “labor,” for purposes of the Miller Act, to mean physical or manual labor.79 That means that clerical and administrative tasks are not “labor” for the purposes of the act, even if they are performed on the jobsite.80 Note that payment bond protection extends only to contracts for providing labor and materials, and not to lenders that provided funds to purchase them. For example, a bank that made loans to a subcontractor, which the subcontractor used to pay for materials and labor, could not recover on the subcontractor’s payment bond.81 As to “materials,” the Miller Act generally covers the costs of materials that are substantially consumed in the prosecution of the work.82 This includes parts and equipment necessary to and wholly consumed by the project and material used in construction but not incorporated into the project.83
Material or labor supplied “in the prosecution of the work” means material or labor incorporated in the project or material or labor supplied for the benefit of the project.84 Even materials that were damaged in transit and were not incorporated into the project have been considered covered under a Miller Act payment bond where the material was furnished “in the prosecution of the work” because the subcontractor had assumed the risk of loss or damage during shipment.85 Similarly, a supplier recovered for delivery of equipment to a subcontractor despite the subcontractor’s subsequent removal of the material from the jobsite and use on another project.86 Following this general line of federal cases, state courts have ruled that a supplier need not show that the materials delivered to the site actually were incorporated into the project.87 When construing these terms for the purposes of the Little Miller Acts, state courts often follow the analysis developed by federal courts interpreting the Miller Act.88
B. Equipment Repairs and Rental
The cost of incidental repairs necessary to maintain equipment during its use on the project also may be recoverable under a payment bond.89 Substantial “replacement” repairs, however, are not covered, on the theory that they add value to the construction equipment by extending its useful life beyond the project in question.90 The fair rental value of equipment leased for use in the prosecution of the contract work also is covered by a Miller Act bond.91 As with equipment repairs, however, the payment bond covers only that portion of equipment rental costs actually associated with use on the project, not any portion of rental costs for any other uses of that equipment.92
Many Little Miller Acts expressly cover the cost of leased equipment under statutory payment bonds.93 In one Little Miller Act case, the surety was found liable to an equipment rental firm for the costs of repairing leased equipment that the contractor had returned damaged.94 Similarly, some forms for private payment bonds, such as AIA A312, quoted earlier, expressly contemplate coverage for equipment.95
Miller Act payment bonds also have been construed to cover transportation and delivery costs.96 Food and lodging have been found to be covered when they are a necessary and integral part of performance.97 Furthermore, as the Miller Act does not limit recovery for services rendered to wages, union dues and contributions to welfare and health funds may be covered.98 In contrast to the broad definitions of “labor” and “materials,” for these employee benefits expenses, courts usually require some direct involvement with and benefit to the project.99
V. Recovery under Payment Bonds for Extra Work, Delay Damages, or Lost Profits, and Other Costs
Generally, courts require a payment bond claimant to state its claim with enough certainty so that a court can determine its damages “with reasonable certainty and accuracy, without resort to conjecture, guess or speculation.”100 This rule applies to claims for extra work, delay damages, and all other costs the claimant is seeking to recover on the payment bond.
A. Extra Work
Work done by a qualifying claimant under an approved change order is generally within the payment bond’s protection. The rationale for covering authorized or approved “extra work” is that it has been incorporated into and has benefited the project; the change order ratifies the fact that the extra work went into the project and that the contractor approved or authorized it. Although sureties have attempted to limit their liability strictly to the contract amount when a payment bond is issued, courts have held that Miller Act payment bonds necessarily involve “some amount of uncertainty.”101
Generally, if a contractor fails to compensate a subcontractor for extra work or fails to approve its change order requests, and the subcontractor can show the extra work comprised labor and materials provided to the project for which the subcontractor can show it is entitled to compensation generally, it may be able to recover the costs of the extra work from the surety.102 For example, in a case where the prime contractor and a subcontractor had agreed on a $175,000 increase in the subcontract amount, the surety was found liable for the contract price plus a portion of the increased amount. The contractor had agreed to pay the subcontractor the additional $175,000 in exchange for the subcontractor agreeing to both an extended payment schedule and a release of any claims the subcontractor had asserted against the contractor (i.e., change order requests). The court found that the surety was liable for the portion of the $175,000 attributable to the claims for extra work waived by the subcontractor.
Courts must determine whether a subcontractor’s claim for extra work is covered by the payment bond when the parties disagree about the nature of the extra work and the surety denies the subcontractor’s claim for that work. To determine how changes should be treated and whether extra work is recoverable under the payment bond, courts look to the terms of the payment bond and the terms of the underlying contract between the owner/government and the prime contractor. For example, in a case involving a Little Miller Act payment bond, the court rejected the surety’s arguments that certain change order work was not “fairly within the contemplation of the parties [to the original contract]” (between the state and prime contractor), and thus was not covered by the payment bond.103 The court found that a subcontractor’s claim was covered under the bond because it involved a relatively small amount of additional work that was similar to the original contract work and was necessary to achieve the contract’s essential purpose.104
B. Damages for Delay, Overhead, and Profit on Performed Work, and Lost Profits on Unperformed Work
Although delay damages were once viewed as outside the scope of Miller Act coverage, it now appears that the Miller Act favors allowing recovery of a subcontractor’s delay damages from a general contractor (or its surety) “regardless of the general contractor’s fault.”105 This broad coverage of subcontractors’ delay damages is justified on the basis that “general contractors have privity of contract with the government and can thus recover delay damages directly from the government, while subcontractors cannot.”106