This post is another in a series on the basic concepts and tenets of public contracting in Pennsylvania. Today’s post concerns surety bonds and surety claims. This topic is of critical importance to subcontractors and suppliers on public works projects.
Under the Pa. Public Works Contractors Bond Law of 1967, all public contracts for public works (defined as the construction, reconstruction, alteration or repair of any public building or other public work or public improvement, including highway work) in excess of $5,000 must be accompanied by both a performance bond (at 100% of the contract price, to protect the owner against non-performance) and a payment bond (at 100% of the contract price, to protect subcontractors, suppliers, and laborers against non-payment).
The surety bonds must be issued by a surety company authorized to do business in Pennsylvania. They must also be filed with the public entity awarding the contract.
Payment bonds protect subcontractors and suppliers who have performed labor or furnished materials on a public project. The protection extends to those with direct contracts with the prime contractor and those with direct contracts with a subcontractor or supplier to the prime contractor.
Claims against payment bonds are governed by the Pa. Bond Law. Direct subcontractors and suppliers can bring a claim 90 days after the last date work was performed or materials were supplied. Second tier subcontractors or suppliers must first give written notice of non-payment to the prime contractor, by registered or certified mail, within 90 days from the last date work was performed or materials were supplied.
If a prime contractor has paid its subcontractor in full, but the subcontractor has not paid its subcontractor or supplier, the second tier subcontractor or supplier is out of luck on a claim against the payment bond. In Trumbull Corp. v. Boss Contruction, Inc., 768A.2d 369 (Pa. Cmwlth. 2001), the Commonwealth Court ruled that in such a case the unpaid second tier subcontractor or supplier is barred by a “safe harbor” provision of the Pa. Procurement Code from bringing a payment bond claim. The “safe harbor” provision states as follows:
“Once a contractor has made payment to the subcontractor according to the provisions of this subchapter, future claims for payment against the contractor or the contractor’s surety by parties owed payment from the subcontractor which has been paid shall be barred.”
The public entity is required to provide a copy of payment bond to a subcontractor or supplier who has not been paid upon submission of an affidavit to that effect.