Subcontractors seeking a piece of the Federal construction spending (pdf) boom beware: you can find yourself with no easy options to collect from a nonpaying prime, if the prime contract — the one you thought was a construction contract — is actually a “commercial items” contract, and the prime contractor did not get a payment bond.

The current wave of Federal construction spending, coinciding as it does with a drop in private construction spending (pdf) attracts many contractors new to, or at least inexperienced with, Federal contracting.  Many try subcontracting at first, instead of prime contracts, thinking that through subcontracts, they avoid some of the requirements, traps, and risks inherent in doing business with the Federal Government.

But one of the persistent risks for a subcontractor — a prime that does not pay its bills — can loom even larger for the unwary subcontractor working on Federal construction projects.  Under the Miller Act and the FAR, in most construction contracts the Government requires the prime contractor to obtain a payment bond, or other protections for subcontractors and suppliers.  The payment bond is supposed to protect subcontractors and suppliers by providing a means of collecting, if the prime refuses to pay.  The Government generally accomplishes this by including a standard clause, e.g. FAR 52.228-15, in the prime contract, requiring the prime to obtain a bond (or take other measures) to protect subcontractors.

However, if the prime contract is designated by the Government as a “commercial items” contract, agencies have taken the position that they are not required to include FAR 52.228-15 — or any other protections for subcontractors — in the prime contract.

Well, one may think, so what?  A construction contract is a construction contract, not a commercial items contract.  If I have a construction contract, the rules for construction contracting apply, and so do the Miller Act and and standard clause FAR 52.228-15.

Not necessarily.  The distinction between “construction” and “commercial items” contracts can be as fine as frog’s hair — a matter of hair-splitting over definitional details.

The FAR defines “commercial item” to include “services of a type offered and sole competitively in substantial quantities in the commercial marketplace.”  Might this definition include projects that one normally thinks of as “construction”?   Don’t bet that an agency has not tried to fit the “construction” square peg into the “commercial items”  round hole.

Indeed, the Federal Government’s chief procurement policy-maker, the Office of Federal Procurement Policy, thought the line was fuzzy enough to confuse agencies.  OFPP encouraged agencies not to overuse commercial items contracting practices for construction work.  In 2003, OFPP issued a memorandum (pdf) warning agency officials that the commercial items rules (FAR Part 12)

“should rarely, if ever, be used for new construction acquisitions or non-routine alteration and repair services.”

Instead, OFPP said, officials should use the rules for construction contracting (FAR Part 36) in those situations.

This is not a new problem, but with the significant increase in Federal spending on construction, there are signs it continues to confuse and surprise unsuspecting subcontractors on Federal construction projects.  In the next post, I will look at the implications for subcontractors suffering under a nonpaying prime.