This new $1.2 Trillion Infrastructure Bill has many contractors thinking about trying their hand at Federal Projects. Bigger doesn’t always mean better though. Especially if this means that there is more risk involved. It’s important to truly think first before you jump and educate yourself on what you could run into when taking on a new federal project! Being aware of what these projects could mean for you and your company could save you from trouble down the road. Keep these practical considerations in mind before you dive into unchartered waters. We’ll take a deep dive into Federal Projects and what this could mean for your business.
Federal Projects Often Require Bonds
Something to consider before you jump into a Federal Project is bonds. Almost all Federal construction projects require bonds. It's important to note that a bond is not insurance. If there is a claim filed on your bond and the bond company pays the claim, you are required to pay back every penny that the surety pays out. To obtain a bond, you have to sign a personal guarantee and pledge your personal assets, which are subject to being taken if you don't pay the bond company back.
There are two types of bonds: a payment bond and a performance bond. A payment bond ensures that all of your laborers and material suppliers are paid. A performance bond will cover the cost of completing your scope of work if you abandon or are terminated from the project. The general contractor will be required to provide a bond to the federal government. In most cases, the general contractor's bond company will require all the subcontractors to "bond back." Bonding back means the subcontractors will get both a payment and a performance bond in the full amount of their subcontract, which is payable to the general contractor if they fail to pay everyone or complete their scope of work.
Federal Projects are Slow Paying
Nothing moves quickly when you are dealing with the government, and this couldn’t be truer when it comes to federal government projects. They are the red tape of the system. It could easily be 90 days from the time you submit a pay application before you get paid, and that is if you are working directly for the government. Due to the pay when paid clause, it may take even longer if you are a subcontractor. It’s important to note that under a pay when paid clause, a general contractor (a contractor that is hired directly by the federal government) has no obligation to pay the subcontractor until the government pays them. Once they are paid, they then have additional time before they are required to pay the subcontractor. Before taking a federal project, you need to make sure you have a steady enough cash flow to handle financing all your materials and labor f the project for months after submitting your pay applications. To learn more about the pay when paid clauses, check out the free course on the subcontractorinstuite.com.
How Federal Bond Claims are Supposed to Work
In addition to slow payments, you cannot file a lien on a Federal Project. You can file a claim on the general contractor's bond to protect your payment, but it is more nuanced than filing a typical lien. As we mentioned earlier, the law requires that the general contractor obtain a payment bond for Federal Projects, but the federal government has no duty to make sure that one is actually provided; this is why it’s so important to get a copy of the general contractor’s bond before you start work. Not only that, but the federal government also has no liability to unpaid contractors and material suppliers, even if they have funds due to the general contractor.
After you make a demand for payment to the general contractor, this demand is then forwarded by the general contractor to their bond company. Because there are obvious problems with this system and this doesn’t always happen, it is important to get a copy of the bond before you sign the subcontract so you know exactly who you need to contact. If you did not get a copy of the bond before you started working; you can still get a copy (if the general contractor actually got one). To do so, contact your local U.S. General Services Administration. Once you request a copy of a bond for a project, they must comply. If you are a subcontractor or material supplier, you need to send the general contractor notice of your bond claim. The notice must be sent within 90 days of the last work or last materials supplied. It is not required to be sent to the bond company, but it will give you more leverage if you do so. Therefore, I would also recommend sending this notice to the bond company.
If you do not sign public works contracts often, it would be worth having your contract reviewed by an experienced construction attorney. Even if you did not want to negotiate any of the terms, it's a good idea to clearly understand what you are agreeing to do when you sign the contract. There are some very risky clauses to be aware of in commercial construction contracts that deal with the federal government. To find out more about these scary provisions for free and how to negotiate them in your contracts, check out subcontractorinstitute.com or call your trusted construction attorney today!
About the Author:
Published author, award-winning lawyer, devoted wife and mother to three girls, and Owner and seasoned Managing Partner of The Cromeens Law Firm (TCLF), Karalynn Cromeens is a true jack of all trades. Karalynn is the Co-Founder of Morrell Masonry Supply and Owner of The Subcontractor Institute, an easy-access online educational platform for contractors. In addition to TCLF, and The Subcontractor Institute, she is also the Host of the rapidly growing educational construction podcast, Quit Getting Screwed - making cost-free industry insight available to contractors across the country. In 2021, Karalynn published two Amazon Best-Selling books - Quit Getting Screwed: Understanding and Negotiating the Subcontract and, in September, Quit Getting Stiffed: A Texas Contractor's Guide to Liens & Collections.
In the seventeen years she has practiced construction, real estate, and business law, Karalynn has reviewed and explained thousands of subcontracts. For years, she has tried saving companies that have signed problematic subcontracts and lost out on being paid for their work. Unfortunately, it was too late by the time they came to her; she could do nothing to help. She hated seeing clients lose money—sometimes their entire business—over language they did not understand and laws they did not know about. Watching these situations play out day after day was the driving force behind her two books, The Subcontractor Institute, and the firm's accessibility efforts. Providing education to contractors on a national level has become Karalynn's personal mission, and she is always doing what she can to help make it a reality.