By Ashley J. Sherwood, Esq.,
Oles Morrison Rinker & Baker LLP
Contractors and suppliers working on federal government projects are likely familiar with the trials and tribulations associated with preserving and exercising rights under the Federal Miller Act (40 U.S.C. § 3131–3134). Whether a claim was timely, what costs may be included in the claim, and whether notice was in the proper form are frequently litigated issues that can make or break your Miller Act claim. However, there is a significant threshold issue that some contractors and suppliers may be overlooking — who may exercise Miller Act rights?
The canned response is that the Miller Act protects only those persons who have a contractual agreement with a prime contractor or subcontractor on a federal project. A person supplying labor or materials to a subcontractor in a Prime Contractor – Subcontractor – Supplier relationship has Miller Act rights, while persons supplying labor or materials to a materialman in a Prime Contractor – Materialman — Supplier relationship do not.
But how do you know whether the party you are supplying materials to is a subcontractor or a materialman? Does labeling someone a “subcontractor” in the contract documents automatically make them such under the Miller Act? What if the materials provided constitute a significant portion of the overall contract price? Whether the “middleman” is a subcontractor or materialman is a crucial determination which directly impacts whether a supplier may pursue a claim under the Miller Act.
In an effort to create consistency, federal courts have adopted a list of twelve factors to be used in
determining whether a party qualifies as a subcontractor or materialman. The more “YES’s” a court can give to each question, the more likely a party is considered a subcontractor.
1. Is the product supplied custom fabricated?
2. Is the product supplied part of a larger, complex integrated system?
3. Is there a close financial interrelationship between the prime and the middleman?
4. Is there a continuing relationship between the prime and the middleman – i.e., periodic shop drawing approval or a requirement that a representative be on-site?
5. Is the middleman required to perform work on-site?
6. Is the term “subcontractor” used in the agreement?
7. Does the middleman’s contract constitute a significant portion of the prime contract (i.e., 15% or more)?
8. Is there a contract for labor in addition to a contract for materials?
9. Is the middleman responsible for furnishing all of the particular material?
10. Is the middleman required to post a performance bond?
11. Is there a contractual mechanism for back charging the middleman for the cost of correcting
12. Is payment made on a progressive basis (i.e., payment applications)?
No one factor is dispositive and there is no minimum number of factors a party must meet in order to
qualify as a subcontractor. Rather, the court’s inquiry is a factual determination and courts examine the nature of the prime contractor - middleman relationship on a case by case basis. Such a circumstance-specific approach should be a warning to both contractors and suppliers. Before challenging a claim or abandoning your rights under the assumption the middleman is considered
a materialman, consider the above factors and determine whether the situation may truly afford protections under the Miller Act.
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