Drewry Simmons Vornehm, LLP

June 2007 Issue
For a print-friendly version, download the PDF.

Subcontractors and Suppliers: Time is of the Essence To Protect Payment Rights on Public Projects

By Sean T. Devenney
Sean concentrates his practice in construction law and litigation and general civil litigation including complex commercial litigation.

Indiana has four separate statutory provisions that govern public works projects. Title 4 governs projects awarded through the State Department of Administration encompassing the majority of State funded construction projects. Title 5 governs State funded projects that are not awarded through the State Department of Administration such as projects awarded and administered by State universities. Title 8 governs projects administered by the Indiana Department of Transportation. Finally, Title 36 governs projects awarded by municipalities and local governments. Under Indiana law, there is no right to file a mechanic’s lien against state and local property. Instead of lien rights on Indiana public works projects, subcontractors and suppliers are given other statutory protections to help ensure payment for their work. However, just like mechanic’s lien claimants, there are certain important deadlines that must be met to trigger the protections afforded subcontractors and suppliers. The following is a brief explanation of the important deadlines that a subcontractor and supplier must meet to protect its right to payment.

Title 4, Title 5, and Title 36 projects have relatively similar provisions providing subcontractors and suppliers on public works projects with significant protections against non-payment from upstream contractors. Under all three public works statutes, an unpaid subcontractor or supplier typically has two different methods for protecting itself against non-payment in addition to direct contract claims against the defaulting party with whom it contracted. On most large construction projects awarded by the State or a municipality, prime contractors are required to provide a payment bond. In addition, each of the statutes provides a procedure for notifying a public owner regarding non-payment which requires the owner to impound sufficient remaining project funds to resolve the non-payment issue.

Title 4 (State Department of Administration) Projects
On Title 4 projects, the unpaid subcontractor or supplier must file a verified claim with the public owner within 60 days of the last labor performed, last material supplied or the last service rendered on the project by anyone to trigger the special provisions to help ensure payment. See Electrical Specialties, Inc. v. Siemens Building Technologies, Inc. 837 N.E.2d 1052 (Ind. Ct. App. 2005). At the same time the subcontractor or supplier files its verified claim with the owner, the unpaid subcontractor or supplier should also file a duplicate of the claim with the surety notifying the surety of the claim. See I.C. §4-13.6-7-10. By filing the verified claim with the owner (with a copy to the surety) within 60 days of anyone’s work on the project, the unpaid subcontractor or supplier will have preserved its rights both against remaining monies held by the owner on the project and against the payment bond surety. At that point, one of two things will happen. The prime contractor may agree that payment is due and owing and the owner can then release any withheld monies directly to the unpaid subcontractor or supplier. See I.C. §4-13.6-7-9(a). However, if the prime contractor contests the subcontractor’s or supplier’s claim, the owner will impound sufficient remaining project funds and wait for a resolution of the claim between the subcontractor or supplier and the prime contractor. See I.C. §4-13.6-7-9(c). At that point, after waiting a minimum of thirty days after having filed its verified claim with the owner and surety, the unpaid subcontractor or supplier can file suit directly against the payment bond surety. See I.C. §4-13.6-7-10(c). The deadline to file suit against the payment bond surety is at least one year after final settlement is reached between the prime contractor and the owner unless the bond itself provides a greater time period to file suit. See I.C. §4-13.6-7-11.

Thus, from the standpoint of the unpaid subcontractor or supplier on a Title 4 project, there are two critically important dates to preserve claims for non-payment against a contractor: (1) The subcontractor or supplier must file a verified claim with the owner within 60 days of anyone’s last work on the project or the bond and the owner will be discharged from any liability; (2) the subcontractor or supplier should consider filing suit against the payment bond surety within one year after final settlement is reached between the prime contractor and owner, otherwise there is a substantial probability that the payment bond surety will be discharged.

Title 5 (State Funded) Projects:
On Title 5 projects the unpaid subcontractor or supplier must act more diligent than a Title 4 claimant to trigger all of its rights. In particular, in order to impound the owner’s funds and receive payment directly from the owner, a subcontractor or supplier must file a verified claim with the owner within 60 days of the work performed by the subcontractor or supplier. Thus, to trigger this protection, the unpaid subcontractor or supplier cannot necessarily wait until the project is completed to file its claim. Like a Title 4 claim, if the prime contractor does not dispute the subcontractor’s or supplier’s claim, then the owner is free to pay the subcontractor or supplier directly from the funds available on the project. See I.C. §5-16-5-1.

The statute is more forgiving with respect to pursuing the payment bond claim, but still requires diligence on the part of the unpaid subcontractor or supplier. In particular, in order to pursue the payment bond surety, the claimant must file a duplicate verified statement of claim with the owner within 60 days of the last labor performed or last material furnished on the project. The owner is required to send one of the copies of the verified statements to the bonding company. See I.C. §5-16-5-1(d). After filing the verified duplicate statement, the unpaid subcontractor or supplier must wait thirty days before bringing suit against the surety. Importantly, the unpaid subcontractor or supplier is also required to file suit relatively quickly to enforce its bond rights. See §5-16-5-2(e). In particular, in order to pursue the payment bond, the unpaid subcontractor or supplier must file suit within sixty days of “final completion and acceptance” of the Project by the owner. Id.

An unpaid subcontractor or supplier on a Title 5 project, to maximize the potential for recovery, should take action to protect its interests by filing a duplicate verified statement of claim seeking recovery within 60 days of its last work on the project. By taking this action, the Title 5 claimant will have impounded only a portion of the remaining project funds, and will preserve its ability to pursue the surety. After waiting thirty days, the subcontractor or supplier should consider filing suit against the surety to preserve its rights against the surety. Even if the Title 5 claimant fails to file its verified statement of claim within 60 days of its last work on the project, the Title 5 claimant should still consider filing its verified claim to preserve its surety rights. However, in order to preserve the rights against the surety, the claimant must have filed the claim within 60 days after the project reaches completion. Failure to meet these deadlines could bar the claimant from recovery against the owner/surety.

Title 8 (INDOT) Projects:
INDOT projects provide similar payment protections to subcontractors and suppliers on INDOT projects. While the INDOT statutes refer to the requirement that the prime contractors procure a “performance bond”, the language required to be contained in the “performance bond” is consistent with relatively standard payment bond forms. See I.C. §8-23-9-12. Hence, like Title 4, 5, and 36 projects, an unpaid subcontractor or supplier has the ability to make a claim against a surety for payment related to its work. In addition, there is a mechanism for “impounding” INDOT monies such that the unpaid subcontractor or supplier can ensure that sufficient project monies will be available to pay for the work performed. The time for filing claims on INDOT projects is longer than other public work projects; however, the process to trigger rights is slightly more complex.

With respect to making a claim to impound State funds, a subcontractor or supplier must file its verified itemized statement of the amount due with INDOT in triplicate within 60 days of anyone’s work on the project or within 30 days of final acceptance of the improvement by INDOT, whichever is less. See I.C. §8-23-9-26. Once the claim is filed, INDOT is to provide the claim to the prime contractor and the payment bond surety. See I.C. §8-23-9-27. INDOT is then to retain out of the amount due the prime contractor the amount of the claim. §8-23-9-28. The prime contractor then has 20 days to notify INDOT in writing whether it accepts or rejects the claim. See I.C. §8-23-9-29. If the prime contractor rejects the claim, INDOT must notify the claimant immediately. See I.C. §8-23-9-30. The claimant then has 90 days to file suit against the prime contractor and notify INDOT of the suit. The claimant must also notify INDOT of the lawsuit and, assuming INDOT has been informed of the suit, INDOT is required to continue to retain the money until resolution of the suit. See I.C. §8-23-9-33.

With respect to making a claim directly against the bond, the process is far less complicated. Basically, an unpaid subcontractor or supplier must file a statement of the amount due with the surety within one year after the acceptance of the work by INDOT on the project. See I.C. §8-23-9-10. The claimant must wait 60 days before filing suit against the surety. See I.C. §8-23-9-11. Finally, the claimant must file suit against the surety within 18 months form the date of final acceptance of the project from INDOT. Id.

To maximize the potential for recovery of unpaid monies, an unpaid subcontractor or supplier should attempt to trigger both its right to direct payment from INDOT and its bond rights. For purposes of accomplishing this protection, the following deadlines should be met. First, the unpaid subcontractor or supplier must have filed in triplicate its itemized statement of amount due within 60 days of anyone’s work on the project or within 30 days of final acceptance of the improvement by INDOT. Assuming the prime contractor disputes the claim, INDOT will notify the unpaid subcontractor or supplier of the prime contractor’s decision. The claimant must then file suit within 90 days of this notice from INDOT and should file suit against both the prime contractor and its surety bond. By meeting these deadlines, the unpaid subcontractor or supplier will preserve both its rights against monies held by INDOT and its rights against the surety.

However, even if the subcontractor or supplier fails to properly file its itemized statement with INDOT as described in the paragraph above, the claimant has a second distinct remedy directly against the bonding company that does not require any involvement with INDOT. See I.C. §8-23-9-33; §8-23-9-10; §8-23-9-11. In particular, to make a claim directly against the prime contractor’s surety, the unpaid subcontractor or supplier need only send the surety a statement of the amount due within one year of the acceptance of the work performed on the project to preserve a right to proceed against the bond. See I.C. §8-23-9-10. After waiting sixty days, the unpaid subcontractor or supplier can file suit against the surety to collect. The lawsuit must be filed within 18 months of date of final acceptance of the project from INDOT. See I.C. §8-23-9-11.

Title 36 (Local) Projects
Consistent with Title 4, 5, and 8 Projects, an unpaid subcontractor or supplier has two methods to ensure payment. First, it can require the owner to impound funds (and pay directly to the claimant) the unpaid amount. Second, it can seek redress against the prime contractor’s payment bond.

In order to preserve a claim to unpaid amounts retained by the owner, the unpaid subcontractor or supplier must act soon after its work is complete. In particular, in order to require the owner to impound funds directly from the prime contractor on the project, the claimant must file its statement of claim within 60 days of its last work on the project. See I.C. §36-1-12-12(b). If there is no dispute about the money being owed, the owner can pay the subcontractor or supplier directly. Id. If there is a dispute, the owner is required to hold the disputed amount until the claim is resolved. See I.C. §36-1-12-12(d). Although the statute is somewhat unclear on this point, the claimant should consider filing suit within 60 days after final completion and acceptance of the project to move the matter toward resolution and still be certain to have required the owner to retain the funds. See I.C. §36-1-12-13.1(e).

The statute is more forgiving in terms of making a proper payment bond claim on local projects. In particular, the unpaid subcontractor or supplier must file a duplicate statement of amount due within 60 days of anyone’s work on the project. See Electrical Specialties, Inc. supra; I.C. §36-1-12-13.1(d). The owner is required to forward the statement of amount due to the surety. The claimant must wait 30 days after filing the duplicate statement with the owner before bringing suit against the surety. The claimant must file suit against the surety within 60 days after the date of final completion and acceptance of the public work. See I.C. §36-1-12-13.1(e).

The critical deadlines to maximize recovery opportunities on Title 36 projects are as follows. The unpaid subcontractor or supplier should consider filing a duplicate statement of amount due with the owner within 60 days of its last work on the project. This simple action impounds monies at the owner level before it is paid to the prime contractor, and preserves a claim against the bond. The unpaid subcontractor or supplier must then wait 30 days to pursue a bond claim, but should consider filing suit soon thereafter. The unpaid subcontractor or supplier must file suit within 60 days of final completion and acceptance of the project.

Overall:
Subcontractors and suppliers should understand that public works projects provide substantial protections against non-payment. However, they must protect themselves by meeting critical deadlines. Each of the major public projects statutes provide two separate protections. First, by filing a timely claim with the owner, the subcontractor or supplier can impound project funds at the owner level, and if there is no dispute, the owner can pay the subcontractor or supplier directly. Second, all of these public works statutes require the prime contractor to provide a payment bond for the protection of subcontractors and suppliers. By meeting deadlines established in the statute the unpaid subcontractor or supplier has this second avenue to receive payment. Failure to meet the established deadlines could be fatal to the claim. Thus, it is critical that an unpaid subcontractor or supplier take timely action to protect its rights.

If you have any questions regarding these cases or related matters, please contact Sean T. Devenney (sdevenney@drewrysimmons.com) at (317) 580-4848 .

top