May 1, 2011

Construction Material Suppliers: Stuck Without a Payment Remedy on Government Projects


By Katie Jeremiah

Spring 2011

To minimize the risk of not getting paid for materials supplied to government construction projects, material suppliers should identify available payment remedies before supplying materials — because there is a chance that there may be no remedy to collect the cost of materials from a nonpaying prime contractor who goes bankrupt or refuses to pay.

Suing the government when you don't get paid is not an option. Unlike private contracting — where lien rights provide a material supplier with a direct-payment remedy against the property owner when a prime contractor defaults — you cannot sue the government on a public contract unless it gives you permission to do so. And it is highly unlikely that the government will give you that permission. But most government construction contracts require prime contractors to provide payment bonds — an agreement by the prime contractor and its surety to pay for labor and material supplied. However, certain contracts do not require bonds, which leave unwary material suppliers without a remedy when a prime contractor does not pay.

In the following situations, a payment bond remedy may not exist:

The contract is a "commercial items" contract. Federal projects that are classified as commercial items contracts rarely require a payment bond. Such contracts are often issued for items like office supplies, but these types of contracts can be problematic when they are issued for the purchase of construction materials, such as base rock that is used in maintaining public roadways. There is a blurred line between what qualifies as a "commercial items" contract (Federal Acquisition Regulation (FAR) part 36) and a construction contract (FAR part 12). Construction material suppliers should enter Part 12 commercial items contracts with great caution, because, as the Office of Management and Budget warned in its 2003 memorandum to agency senior procurement executives, "Part 12 lacks clauses for handling critical circumstances common to construction efforts, especially those involving new construction or non-routine alteration and repair services. The current coverage in Part 12 fails to allocate risk in a manner that takes into account the nature of [varying conditions inherent in construction projects]."

The project value is less than the threshold requiring a bond. Oregon does not require a payment bond for projects that are estimated by the contracting agency to have a value of $100,000 or less, or in the case of transportation projects, $50,000 or less. Federal law does not require a bond for contracts that are for $100,000 or less.

A payment bond exists, but it is not for the benefit of a material supplier. State and federal timber sale contracts often require the purchaser to make improvements to government land as a condition of the timber sale. While the government usually requires that the purchaser post a payment bond as a condition of the timber sale, the bond is not for the benefit of the contractor hired to make the required improvements. It is executed and delivered only to ensure that the purchaser will pay the government the agreed price for the timber. If the purchaser or the purchaser's contractor fails to pay for the improvements, subtier material suppliers are left without a payment remedy.

The bond requirement is waived. Oregon law allows a waiver of the payment bond in cases of emergency. This waiver has been applied in cases such as the 2007 emergency flood mitigation work in Tillamook County.

Because these types of contracts may not require a payment bond, or the payment bond that is required may not be accessible to the party supplying materials for a project, a material supplier should identify what security rights it has before agreeing to supply materials. It is far easier to collect such information before material is supplied and problems occur. If a payment bond is not required, a material supplier should contact an attorney who can help consider alternative forms of securing payment from a prime contractor, such as a bank institution's letter of credit or cash escrow. By identifying the risks of nonpayment before supplying materials for a project and properly securing payment, a material supplier can be sure that it gets timely paid.

Back to Top