Legal Protections for Subcontractors on Federal Prime Contracts

Kate M. Manuel
Legislative Attorney

This report discusses payment and other protections for subcontractors on certain federal contracts under the Miller Act, the Prompt Payment Act, and the Small Business Act. Such protections have recently become a topic of congressional and public interest because of the effects of the recession upon small businesses. Many subcontractors on federal prime contracts are small businesses, and small businesses generally receive special consideration under federal law and policy. 

The Miller Act of 1935 authorizes subcontractors who furnished labor or materials used in carrying out federal construction projects valued in excess of $100,000 to bring a civil action against prime contractors' payment bonds to obtain payments due. Congress enacted the Miller Act to compensate for the difficulties that subcontractors would otherwise have in obtaining payment from federal construction contractors, given that they cannot place a mechanic's lien on the work because the government has sovereign immunity. The doctrine of sovereign immunity protects the government from being sued without its consent, and the Contract Disputes Act waives the government's sovereign immunity only as to suits involving contracts to which it is a party, not subcontracts under these contracts. Relatedly, there is no privity of contract, or direct contractual relationship, between the government and the subcontractor, which means that the subcontractor cannot sue to enforce the payment or other terms of the subcontract against the government. 

The 1988 amendments to the Prompt Payment Act provide an additional form of payment protection for subcontractors on federal construction contracts by requiring federal agencies to include in their contracts a clause obligating the prime contractor to pay the subcontractor for "satisfactory" performance within seven days of receiving payment from the government. Absent such a clause in the prime contract, the prime contractor would generally be free to agree to whatever payment terms it wishes with the subcontractor and would not necessarily pay the subcontractor as quickly. 

The Small Business Act provides a different sort of protection for some prospective subcontractors by requiring that prime contractors agree to plans for subcontracting some percentage of the work to be performed under certain federal contracts with various types of small businesses (e.g., women-owned small businesses, service-disabled veteran-owned small businesses). Without such subcontracting plans, or similar contract terms, prime contractors would be free to subcontract with whomever they wish for the completion of work under the contract and would not be required to deal with these categories of small businesses. 

Members of the 111th Congress have introduced legislation that would augment these protections by (1) requiring contractors with subcontracting plans to notify the Small Business Administration (SBA) whenever they pay a reduced price to a subcontractor (S. 2989); (2) requiring that contractors work with the subcontractors whom they identified in any subcontracting plans submitted with their bids or offers (H.R. 4134); and (3) requiring SBA to promulgate regulations to govern its review of subcontracting plans, including standards for determining contractors' "good faith compliance" with such plans (H.R. 5109).


Date of Report: May 10, 2010
Number of Pages: 13
Order Number: R41230
Price: $29.95

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