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Waiving Payment Bond Costs Tax Payers Over $32,000




The Iowa Department of Transportation now owes 3 subcontractors over $32,000 due to a Supreme Court decision ruled on January 31, 2014.  Why?  Because the subcontractors were not required to post a payment bond on a public works contract.

The case involves a Universal Concrete LTD, a general contractor, who was awarded aPublic Works Need Performance Bonds contract for highway improvements made in Adair County in Iowa.  Universal Concrete hired Star Equipment, Manatt’s Inc. and Short’s Concrete Cutting Co. as subcontractors on the project.  When the 3 subs were not paid, they sued the Iowa DOT for non-payment, based on a 1988 law that allows subs to seek payment from the state when the general contractor does not pay them.  In a normal public works project, the subcontractors would simply make a claim against the general contractor’s payment bond, and its surety company would be obligated to pay. The reason the subs could not make a claim against the GC’s payment bond was because there was no bond in place due a contract class in Iowa called “Targeted Small Business”; a program for minority owed business which exempts those in the program from posting a performance and payment bond.  The purpose, presumably, is that providing a bond is a hurdle and difficult for many small business to obtain.

While the intent of “Targeted Small Business” seems well intentioned, it opens the playing field to un-bondable contractors by allowing them to bid bon public works projects without a bond. In doing so, it leaves little recourse for many parties including subcontractors, suppliers, and the obligee itself who would otherwise be protected by a bond.  If Iowa DOT adhered to the Miller Act, the legislation passed that requires public works contractors to post performance and payments bonds, the $32,000 would have been paid out by a surety company rather than the DOT.  This example left the taxpayers with a $32,000+ bill, only time will tell what the next claim will end up costing taxpayers.

 




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