Tribal Construction Projects: How They Differ and How You Can Stay Protected

More opportunities to participate in tribal construction projects could be on the horizon. The Infrastructure Investment and Jobs Act legislation passed in November includes more than $13 billion for tribal communities across the country, and makes them eligible for billions more, according to a White House statement.

"The trends in tribal construction will be all over the map depending on tribal needs and available funding," said James Sander, attorney for Larkin Hoffman (Minneapolis, MN). "Housing is a perennial issue, but many tribes are exploring business developments such as hotels and resort facilities to build on casino revenues."

To fulfill these needs, indigenous communities often turn to sources outside their nations. "Tribal communities may not have the expertise or access to skilled labor, equipment or materials needed for the projects," said Sam Smith, regional finance manager for Crescent Electric Supply (East Dubuque, IL). "They have to contract with companies outside the tribe for these materials and services. From a credit perspective, the biggest challenge for outside organizations doing tribal work is evaluating the risk of nonpayment."

Creditors must be aware that tribal projects are performed under the ownership of the sovereign government within the tribal land, Sander said. "Tribal governments enjoy sovereign immunity. For the construction industry, this means tribal lands are 'outside' a particular state. So, state laws on mechanic liens, construction liens and contract laws, to some extent, do not apply."

You are bound to the tribal construction policy and must follow all tribal laws governing the construction of all projects, said Ty Knox, ICCE, director of credit and risk for EFCO Corp. (Des Moines, IA). "Each tribe has its own set of tribal laws. Get educated on the tribal laws governing the project, and try to ensure there is a bond before committing to the project."

Creditors must treat any work or services performed as unsecured unless some form of security is put in place, Smith said. "If your organization is going to provide labor or goods to a tribal project with no security, a thorough understanding of the tribal court process needs to be researched."

Tribal governments cannot be sued unless the tribe agrees to waive its immunity, said Connie Baker, CBA, director of operations for NACM's Secured Transaction Services. Liens cannot be filed on sovereign land, so unless the general contractor takes out a payment bond, there would be no security. Suppliers would only have the right to sue their customer for nonpayment, she continued.

"Inquire about the availability of a payment bond," Smith said. "There is no requirement for a tribe to have a payment bond in place, but tribes understand the concern regarding payment delinquency on projects. So, in order to console contractors and suppliers, a payment bond may be issued." If a bond is issued, have a qualified individual review it to understand your rights and any requirements or timelines it may contain, he continued.

Subcontractors and suppliers are excluded from prime contracts with the tribal entity, so they depend on the steps the prime contractor takes to protect payment rights, Sander said. "Subcontractors and suppliers should understand what the project is, how it is being funded and what measures, if any, the prime contractor has taken to protect payment. As with any contract now, one of the important contract clauses is price escalation."

Subcontractors and suppliers must watch out for "pay if paid" language that could leave them without payment protection if the project or prime contractor should fail. Additionally, look for a waiver of sovereign immunity clause in the prime contract, he continued. "This would permit a tribal entity to be sued in state or federal court."

Depending on the type of project, a lien on the leasehold interest may be a possibility, Smith said. "For example, if a tribe leases oil rights on its property to an outside driller that you supply material to, a lien on the lease may be possible to secure your payment in the event of nonpayment from your customer."

Creditors also can ask for a joint check, which will not guarantee payment, but would allow the general contractor to cut the check in both the subcontractor's and supplier's names, Baker said.

-Bryan Mason, editorial associate