Understanding the Unique Nature of Public Construction Projects

Public construction is unique in that receivables are secured by payment bonds posted by the general contractor. Public construction projects are either owned by the federal government or state governments, and with the passage of the $1.2 trillion infrastructure bill that means more of these types of projects will become a reality.

Suppliers and subcontractors must understand and utilize statutes to protect their rights, said Chris Ring, of NACM Secured Transaction Services. "You are not allowed to file liens on publicly owned pieces of property, so the payment bond posted by the general contractor replaces a mechanic's lien as a form of collateral."

Federal and state construction projects fall under the Miller Act and Little Miller Act, respectively. "The statutes require payment bonds be posted for downstream material suppliers to claim against in the event of nonpayment," Ring said.

When working on a government project, subcontractors and suppliers should know who the general contractor is, what bonding company it has hired and the steps to claim against the payment. Furthermore, not all government-owned projects are funded by the government entity, so the process of claiming against the payment will differ under these circumstances.

In addition, there are public private partnerships [PPP], cooperative arrangements between two or more public and private sectors. "Basically, the government entity is the property owner, while private investment money is used to fund the project," Ring said. "Prior to PPP legislation, subcontractors had no way to secure their receivables because liens could not be filed, and there was no payment bond to claim against. PPP laws require general contractors to post a payment bond to protect subcontractors and material suppliers in the event of nonpayment. Credit professionals must be aware of what the rules of engagement are for PPPs and securing their receivables."

Due to the unique nature of each of these types of statutes, Ring urges credit professionals to fully understand them in order to take advantage of their rights. Attorney Katy Baird, of Andrews Myers PC (Houston, TX), and credit managers DeAnna Leahy, CCE, of Sunroc Corporation (Orem, UT), and Sam Smith, of Crescent Electric Supply Company (East Dubuque, IL), will cover both statutes as well as public private partnerships in more detail on June 7 during NACM's 126th Credit Congress & Expo in Louisville, KY.

-Bryan Mason, editorial associate

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Friday, 01 March 2024

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