Texas Public Works Projects
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The legal framework for public construction works in Texas is different than that for private work. Liens are not allowed on public lands, so a different scheme involving claims against bonds has developed. Whether a contractor working on a public job in Texas may bring a claim against a payment or performance bond depends on where they fall on the "food chain."
A prime contractor is one who has a contract for work directly with the governmental body. A prime contractor must furnish a payment bond for the benefit of subcontractors and suppliers. The performance bond protects the governmental body from a defaulting prime contractor.
A. Payment Bonds -- Protection for Subs and Suppliers
1. Limited Subcontractor and Supplier Protection
Because no liens are available, the best source of protection for subcontractors and suppliers to public work prime contractors is the payment bond. The prime contractor, for any Texas governmental job over $25,000.00, is required by law to post a payment bond. Tex. Gov't Code § 2253.021 (formerly known as the McGregor Act). School districts are considered governmental bodies under the Government Code.
2. Coverage and Bond Amounts
For public jobs under $25,000.00, the Texas Property Code does provide for a limited sort of lien on the project, but since most public works jobs are more than $25,000.00, this provision is rarely used. The amount of the bond the prime contractor is required to obtain for jobs over $25,000.00, is the amount of the prime contract. The amount of the bond limits the amount available to claimants who perfect their claims. If the total claims exceed the limit of the bond, the claimants share pro rata.
3. Not All Parties Protected
Bond claims may not be available to lower tier subcontractors and suppliers, i.e., those who do not have contracts with a subcontractor of the prime contractor, or with the prime contractor. The old McGregor Act allowed anybody who could prove their work or materials made it into the job to make a bond claim. The recodification of the McGregor Act in 1993 was not supposed to change the law, but in fact it may have. "Subcontractor" is defined in the Texas Government Code as "a person, firm, or corporation that provides public work labor or material to fulfill an obligation to a prime contractor or to a contractor of the prime contractor for the performance and installation of any of the work required by a public work contract." Tex. Gov't Code § 2253.001(9). Texas courts have not told us yet whether this definition excludes from bond protection anybody more distant from the prime contractor than a sub-subcontractor.
It is critical that the claimant file its claims in proper form, on time. The claim forms must be sent to the correct parties; otherwise, a valid claim can be lost, and left unpaid.
4. Time Limitations
To file a bond claim, the claimant must file notices with the prime contractor and with the surety who provided the bond. The addresses of the prime contractor and the surety may be obtained from the governmental entity for whom the work is being performed. The governmental unit may charge a reasonable fee for the copies.
For a subcontractor with a direct relationship to the prime contractor, the notices must be mailed on or before the 15th day of the third month after each month in which the labor was performed or the materials supplied.
A third-tier subcontractor or supplier (one whose contract is with a subcontractor of the prime contractor) must send an earlier notice in addition to third month notice. A third tier subcontractor must send a notice to the prime contractor on or before the 15th day of the second month after each month in which the labor was performed or the material was delivered.
A third-tier contractor who has a retainage claim must also send a 15th day of the second month notice to the prime contractor, indicating that its contract provides for retainage, and generally stating the nature of that retainage.
Eligible contractors who provide specially fabricated material must also send a 15th day of the second month notice. In addition, specialty fabricators must provide a "front-end" notice to the prime contractor. On or before the 15th day of the second month after the specialty fabricator has received and accepted an order for specially fabricated material, it must send the prime contractor notice that it has received and accepted the order. So this notice may be required before anything is delivered to the project.
All second and third month notices must be sent by registered or certified mail.
5. Notice Requirements
The third month notice must be accompanied by a sworn statement of account that states the amount claimed is just and correct, and that all just and lawful offsets, payments and credits have been allowed. Subtract out the retainage or include it, but make it clear what you are claiming. A copy of the contract showing what parts have been completed or the value of partial completion also will suffice.
6. Litigation on Payment Bonds
If the surety refuses to pay the bond claim, a lawsuit against the surety and the prime contractor must be initiated before the expiration of one year after the date of mailing the claim. Reasonable attorneys' fees may be recovered.
7. Damages Recoverable
Bond claimants may recover for those items of work for which notice has been given properly, but never for more than the amount of the bond. Items not covered in the subcontract, like non-contractual extras and delay claims, are not covered. The claim also may not exceed the proportion of the subcontract price that the work done bears to the total of the work covered by the subcontract.
8. Defenses to Bond Claims
You can bet the surety will raise every possible defense to a bond claim. These defenses most often include lack of timely notices and lack of proper notices, even if they were sent on time. The notices and what they contain are crucial, or the subcontractor will be left with a lawsuit against a prime contractor who may be broke. The surety also has all of the defenses that the bonded contractor has.
B. OBTAINING CONTRACT RETAINAGE
If the subcontractor's claim is for retainage, special rules apply.
First, the lower tier subcontractor must provide the prime contractor written notice that the subcontract calls for retainage and describe generally the nature of the retainage. This notice must be sent on or before the 15th day of the second month after the date of the beginning of the delivery of public work material or the performance of public work labor.
Before filing suit on a contract for retainage, written notice of the claim must be provided to the prime contractor and the surety on or before the 90th day after the date of final completion of the public work contract. The notice must state the amount of the contract; the amount paid; and the outstanding balance.
A retainage claim is never valid for more than ten percent of the amount of the contract.
C. ENFORCEMENT
What can the prime contractor do to collect money from the public owner? Enforcing a public works contract can be tough from the prime contractor's perspective. Public work by definition is for a governmental entity that has sovereign immunity and cannot be sued without legislative consent. Getting the Texas Legislature to pass a bill allowing a contractor to sue an arm of the State of Texas is not easy, although it happens occasionally. The Texas Supreme Court recently affirmed that contractors cannot sue the state without legislative consent.
In Federal Sign v. Texas Southern University, 40 Tex. Sup. J. 676, 1997 Tex. LEXIS 58 (Tex. 1997) the Court disallowed a contractor's claims on a public works job, a score board. Federal Sign had been awarded a contract by Texas Southern University to build scoreboards. After starting on the work in its shop and incurring significant costs (but before installation had begun), TSU canceled the project. Federal Sign sued for breach of contract, seeking the value of the work that already had gone into building the scoreboard. The Court held that the TSU was entitled to sovereign immunity because it was a state agency. The contractor could only sue the state if it had received legislative permission to do so. Because the Texas Legislature had not consented to waiving the State's sovereign immunity, Federal Sign's claim was dismissed. Federal Sign was not paid, even though TSU breached the contract. Public work thus has its own special risks.
Under the Texas Government Code, if a prime contractor walks the job or gets fired, it does not get any contract funds it is owed until all costs of completion are paid from the contract balance, and the surety gets reimbursed. The prime contractor is liable to the owner for the difference between its bid, and the next low bidder.
A subcontractor is not allowed to bring suit on a bond claim until 61 days after the unpaid claim has been made. Note that this time frame, combined with the one year statute of limitations, means that a subcontractor has only about a ten month window to sue on a bond claim.
© 1997 Greenberg Peden P.C.