By: Michael H. Payne
Subcontractors who are performing work on Corps of Engineers construction projects in Afghanistan frequently experience financial difficulties because they are not paid promptly and, in some cases, they are not paid at all. Unlike construction projects performed in the United States, payment bonds have frequently not been required by the Corps in Afghanistan. FAR 28.102-1 provides that “The Miller Act (40 U.S.C. § 3131 et seq.) requires performance and payment bonds for any construction contract exceeding $150,000, except that this requirement may be waived (1) by the contracting officer for as much of the work as is to be performed in a foreign country upon finding that it is impracticable for the contractor to furnish such bond. . .” It is this exception that has been invoked to waive the usual payment bond requirement.
When a payment bond is in place, a subcontractor who has not been paid has the right to file a Miller Act suit in Federal Court demanding payment by the prime contractor’s surety. When there is no payment bond, subcontractors are at the mercy of prime contractors who, in some cases, have proven to be dishonest. With no surety to act as a guarantor of payment, subcontractors are forced to file suit directly against American prime contractors, in U.S. courts, or to take advantage of the laws of the local jurisdiction when dealing non-American prime contractors. Under this system, unscrupulous prime contractors can “play the system” by denying payment and effectively betting that the subcontractors will not have the capability, or the resolve, to do anything about it.
In our view, when the Corps of Engineers is aware that a prime contractor is breaching its subcontractor obligations, the Corps should quickly intercede before potentially catastrophic losses are incurred by the subcontractors. In fact, funding should be withheld from the prime and used to make direct payments to subcontractors. This makes eminently good sense because the United States cannot be promoting business opportunities for Afghani subcontractors, in an effort to cultivate the growth of viable construction companies within Afghanistan, and then stand idly by while those subcontractors are victimized by unscrupulous prime contractors. In many cases, the denial of payment by a prime contractor can result in the collapse and financial ruination of the subcontractor’s business. Although we understand that the Corps does not have privity of contract with subcontractors on a federal project, when the protection of a payment bond is not available we believe that the Corps should not stand idly by and hide behind a “lack of privity.”
We are aware that payment bonds are now being required on many Corps of Engineers’ projects, but that is of little help to those who did not have the protection of a bond on a prior contract. In addition, it is not easy for contractors to secure bonding to do work in Afghanistan, since many U.S. Treasury listed sureties are unwilling to issue the bonds. Although FAR 28.202(b) provides that “for contracts performed in a foreign country, sureties not appearing on Treasury Department Circular 570 are acceptable if the contracting officer determines that it is impracticable for the contractor to use Treasury listed sureties,” the approval of non-listed, or foreign, sureties has been inconsistent. Undoubtedly, many of the payment difficulties being experienced by subcontractors doing work in Afghanistan, and Iraq, could have been avoided if bonding had been required and facilitated by the Corps of Engineers.
Michael H. Payne is the Chairman of the firm’s Federal Practice Group and, together with other experienced members of the group, frequently advises contractors on federal contracting matters regarding projects performed in the United States and other countries around the world.