September 25, 2008

Everyone who is in business is presumably in business to make money. Those in the construction industry are no different. Given the nature of the business contractors, subcontractors and material suppliers are constantly dealing with new people or companies, many of whom are unfamiliar. Accordingly, every contractor, subcontractor or material supplier wants some assurance or protection regarding payment. On private jobs, there are mechanic’s lien rights. On public jobs, however, such is not the case. Since 1894, Congress has enacted laws to offer those furnishing labor and materials for federal construction projects some protection. Currently, the Miller Act is the federal statute which provides this protection. (40 U.S.C. § 3131, et seq.).

What Does the Miller Act Do?
The Miller Act requires a contractor on a federal project for the construction, alteration or repair which exceeds $100,000.00 to provide “[a] payment bond with a surety…for the protection of all persons supplying labor and material in carrying out the work provided in the contract.” 40 U.S.C. § 3131(b)(2). The Act allows every person who furnishes labor or material for work provided in a contract by a contractor for which a payment bond is furnished to file a lawsuit on the payment bond, if they are not paid in full within 90 days of the last date labor was performed or materials were supplied. Additionally, the Act allows for anyone with a direct contract with a subcontractor, express or implied, to also bring a lawsuit, if that party is not paid in full. 40 U.S.C. § 3133(b)(1).

An "Act of Congress"
Congress elected not to define the term subcontractor in the Miller Act. But subcontractor is such a common term, does it really need to be defined? Leave it up to the federal courts and lawyers and the answer is resoundingly: YES. However, many of the federal courts have had differing opinions as to who is a subcontractor. In 1944 the Supreme Court made it as clear as mud when it expressed that in the Miller Act ‘Congress used the term subcontractor in the technical sense to apply to “one who performs for and takes from the prime contractor a specific part of the labor or materials requirements of the original contract, thus excluding ordinary laborers and materialmen."’  Clifford F. MacEvoy Co. v. United States ex rel. Calvin Tomkins Co., 322 U.S. 102 (1944).  Perhaps it will truly take an "Act of Congress" to define who is a subcontractor, but Congress hasn’t acted yet.

Recent Decision
Recently, the 3rd Circuit of the United States Court of Appeals, found that a second tier firm that arranged for fabrication and delivery of structural steel and provided other services based upon a purchase order was a subcontractor for purposes of the Miller Act. U.S. ex rel E&H Steel Corp. v. C. Pyramid Enters., 509 F.3d 184 (3rd Cir. 2007). In rendering its opinion the court focused on the relationship between the general contractor and the steel supplier. The court determined that for the project before it, there were not a large number of subcontracts awarded. The purchase order with the steel supplier was the largest subcontract (7.8 percent of the total project costs). Based upon the size of the purchase order (subcontract), the court determined that the general contractor could have requested the steel supplier to provide a bond. The court acknowledged in the opinion that it was taking a very liberal interpretation of the Miller Act, based upon precedent set by the Supreme Court.

Practical Significance
This broad reading of subcontractor is important as many very small lower tier firms are used to satisfy or fulfill the government’s goals on small business type subcontracting. In that context, the main things the courts will look at:

Substance over Form
It does not necessarily matter whether there is a purchase order or contract, such is not the controlling fact as to whether one is a supplier or a subcontractor. Instead, the courts will look to the relationship of the parties. Answering yes to most of these questions will likely mean that the material supplier will be deemed a subcontractor by the court.

• Does the material supplier perform or take from the prime contractor a specific part of the labor or materials required by the original contract?
  
  In other words:
  
• Does the material supplier take a role in design?
  
• Does the material supplier submit shop drawings?
  
• Does the material supplier assist in the submittal selection?
  

• Does the material supplier have a substantial and important relationship with the prime contractor?
  
• Does the material supplier stay in communication regarding installation or other aspects of the materials supplied?
  
• Is the material supplier responsible for a large percentage of the materials supplied?
  
  
• Can the prime contractor require the material supplier to post a bond, or would the prime contractor have recourse against the material supplier for financial loss?
  

Summary 
The end result is that titles in a traditional sense may not matter under the Miller Act.  A material supplier may well be a subcontractor. If a prime contractor is reliant on the material supplier and the material supplier is taking an active role in the construction of the project through design, submittals or shop drawings or has a large percentage of the materials to be supplied, it is an error to assume that the material supplier is not a subcontractor.

Matthew E. Cox
704/334-3459
[email protected]
Member of the State Bars of South Carolina and North Carolina