Subcontractor Rights Against a Government Contract for Nonpayment

Subcontractors don't bid on government jobs. Bidding is for the general contractors who hire them. But subcontractors have the right to be paid for their work and within a reasonable time under the law. Many subcontractors are small-business owners governments strive to support through legislation. Congress passed three laws to protect subcontractors against nonpayment and late payment for their services. State and local governments have similar laws, but federal law covers all U.S. subcontractors.

General or principal contractors use subcontractors for projects requiring special skills. Electricians, roofers, plumbers and painters often are construction subcontractors. Software writers and programmers sometimes work as subcontractors on large IT projects. General contractors are responsible for paying subcontractors according to contract terms. And they work with and report to government contracting officers on federal projects.

The 1935 Miller Act allows subcontractors who supply a federal government's construction project with more than $150,000 worth of labor or materials to take civil action against nonpaying contractors. Suits are filed against payment bonds, a type of insurance bid-winning contractors carry to guarantee payment to subcontractors, employees, suppliers and creditors when projects are completed. Subcontractors don't deal directly with the federal government, which has immunity from liens and other adverse actions subcontractors would normally use against project owners for nonpayment. The Contract Disputes Act waives the government's immunity in disagreements with contractors, but not subcontractors. The Miller Act gives subcontractors a way to recover wages on federal projects.

Under the Prompt Payment Act, federal agencies must include clauses in construction contracts that require contractors to pay subcontractors within seven days of receiving government funds for a project. Subcontractors' work must be considered "satisfactory" based on contractors' standards. Congress approved the Prompt Payment Act to discourage contractors from paying subcontractors on their own terms and whenever they choose. But disagreements between contractors and subcontractors can't involve the federal government, and neither party can go after the government to pay subcontractors.

The Small Business Act promotes small companies' participation in the marketplace. Contractors must make a "good faith effort" to subcontract with small businesses listed in their proposals or bids for the job and to explain the reason for not doing so to the contracting officer in charge. A 2010 amendment to the law requires contractors to notify government contracting officers whenever they discount subcontractors' pay after completing a job or when payment is 90 or more days past due.

The U.S. Small Business Administration recommends that companies understand contract conditions and terms, and the laws that protect them, before signing on as subcontractors. Businesses need to know what happens if contractors pay late or not at all, and they need to ask how they'll be paid. Two payment options are electronic fund transfers, or ETFs, and government credit cards. Other options include partial payment to suppliers for partial deliveries and progressive payment based on the work's progress.