What is a subcontractor? The answer to this question seems obvious – a subcontractor is a contractor that contracts with the prime contractor to perform a scope of work on a construction project. However, it is not always easy to distinguish a subcontractor from a materials supplier (sometimes referred to as a “materialman”). That distinction is important in the context of claims by lower-tier subcontractors or materials suppliers on payment bonds, such as those provided by prime contractors on federal and state public works projects. That is, a lower-tier subcontractor or materials supplier may not be entitled to recovery from a payment bond if its contract is with a materials supplier instead of a subcontractor. Therefore, identifying the role of the party with whom a contractor is contracting is a key task the prudent contractor will perform at the outset of a project.
This distinction is most important in the context of federal public works projects. For those projects, the Miller Act restricts claimants on payment bonds to those who had a contract with the prime contractor and those who had a contract with a subcontractor, provided that in the latter case the claimant provides notice to the prime contractor. In other words, if a firm has a contract with a materials supplier, as opposed to a subcontractor, the firm does not have entitlement to payment under the bond. Courts look at the “total relationship” between the parties to determine if the party in question is a subcontractor or materials supplier.
Courts have applied a balancing test to make this determination, with some factors weighing in favor of a subcontractor relationship and other factors weighing in favor of a materials supplier relationship.
The factors weighing in favor of a subcontractor relationship are: 1, the product supplied is custom fabricated; 2, the product supplied is a complex integrated system; 3, a close financial interrelationship exists between the companies; 4, a continuing relationship exists with the prime contractor as evidenced by the requirement of shop drawing approval by prime contractor or the requirement that the supplier’s representative be on the job site; 5, the materials supplier is required to perform on site; 6, there is a contract for labor in addition to materials; 7, the term “subcontractor” is used in the agreement; 8, the materials supplied do not come from existing inventory; 9, the supplier’s contract constitutes a substantial portion of the prime contract; 10, the supplier is required to furnish all the material of a particular type; 11, the materials supplier is required to post a performance bond; 12, there is a back-charge for cost of correcting the materials supplier’s mistakes; and 13, there is a system of progressive or proportionate fee payment.
On the other hand, the factors weighing in favor of a materials supplier relationship are: 1, a purchase order form is used by the parties; 2, the materials come from pre-existing inventory; 3, the item supplied is relatively simple in nature; 4, the contract is a small percentage of the total construction cost; and 5, sales tax is included in the contract price. As the above amply illustrates, the determination of whether a party is a subcontractor or materials supplier for purposes of a claim on a Miller Act payment bond is a complicated and fact-intensive one.
Conversely, Oregon’s Little Miller Act simply provides that a “person” who supplied labor or materials for the performance of the work provided for in a public contract has a right of action on the contractor’s payment bond. The Little Miller Act states that this includes “any person having a direct contractual relationship with the contractor furnishing the payment bond or a direct contractual relationship with any subcontractor.” Therefore, the plain language of the statute does not limit claimants to those with such direct contractual relationships, but merely “includes” them among potential claimants. No Oregon court has interpreted the bond statute to limit claimants to those who contract only with the prime contractor or a subcontractor. Therefore, the distinction between “subcontractor” and “materials supplier” does not appear to be decisive in determining whether a party may make a claim on an Oregon Little Miller Act payment bond, as it is in the context of federal Miller Act bond claims.
However, the subcontractor-versus-material-supplier distinction does rear its head in Oregon in the context of Oregon Construction Contractors Board (CCB) bonds. The controlling statute allows contractors to make claims on the CCB bonds of its subcontractors but does not provide for claims by contractors against materials suppliers. Thus, the same issue arises here as in Miller Act claims: if the subcontractor against which the contractor brings a claim is actually a materials supplier, the contractor will not have access to the CCB bond. While Oregon courts have not adopted the federal courts’ test to determine whether a party is a subcontractor or a materials supplier, this test would provide guidance in making that determination.
Thus, determination of whether the party with which a firm is contracting is a subcontractor or a materials supplier can become an important one in terms of access to payment bonds; and therefore, is a determination that should be made, to the extent possible, at the outset of a project. If recovery from a payment bond is barred or seems questionable, the prudent contractor will take other measures (e.g., proposing a joint check agreement) to secure payment.
Brent Carpenter is an attorney at Jordan Ramis PC. He focuses his practice on construction law. Contact him at 503-598-7070 or [email protected]. Note: This article is intended to provide readers with general information and not legal advice.