Who May Claim, by Tier

A payment bond secures payment for those who supplied labor and material to a project, but not for all of them. The protected class is defined by contractual distance from the prime contractor, counted in steps. Persons within the permitted number of steps may sue on the bond; persons beyond it have only their contract claim against whoever they dealt with. That line is set by statute, and it does not move because a claimant did valuable work or because the money plainly flowed through the project.

How the tiers are counted

The federal statute grants a right of action to every person that has furnished labor or material in carrying out the bonded work and has not been paid in full within ninety days after last furnishing. It then adds a condition for one group: a person having a direct contractual relationship with a subcontractor but no contractual relationship, express or implied, with the prime contractor must give written notice to the prime within ninety days of last furnishing.

Reading those two provisions together produces the familiar structure. The first tier is composed of parties with a direct contract with the prime contractor, whether subcontractors or suppliers. They may sue without any preliminary notice. The second tier is composed of parties with a direct contract with a subcontractor. They may sue only if they gave the statutory notice. A third group, parties whose only contract is with a supplier rather than a subcontractor, is generally held to fall outside the statute altogether, because the notice provision reaches only those dealing with a subcontractor.

The distinction that decides the tier

Whether a given party is a subcontractor or a mere materialman is therefore the pivotal question, and it is answered by what the party undertook rather than by the label used in the paperwork. The inquiry looks at whether the party took responsibility for a defined portion of the prime contract work, whether the goods were specially fabricated for this project, the extent of on-site activity, the presence of a written agreement covering a scope of work rather than a purchase order, and whether the prime contractor dealt with the party as a performing entity.

Two further points about the inquiry are worth recording. It is fact-intensive, so it is rarely resolved on the pleadings and often survives to trial. And it is not answered by the contract's own recital: an agreement titled a purchase order may describe a scope of work performed on site, and an agreement titled a subcontract may cover nothing but delivery of stock goods. Courts look past the caption to the substance of what was undertaken.

The consequence runs downstream rather than to the party itself. A first-tier party has a bond claim in either capacity. What changes is the position of that party's own customers: if the first-tier party is a subcontractor, its suppliers are second tier and protected on giving notice; if it is a supplier, its own suppliers are outside the class. Parties two steps from the prime therefore have an interest in a classification made in a contract to which they are not privy.

Where the states draw the line differently

State statutes do not all use the federal structure. California defines the class by reference to a separate provision listing persons who may give a stop payment notice or claim against a payment bond, which reaches any person providing work for a public works contract where the work was authorized by a direct contractor, a subcontractor, an architect, a project manager or another person having charge of all or part of the contract, and separately protects laborers. That formulation is keyed to who authorized the work rather than to the number of contractual steps.

Michigan conditions the right of action of a claimant lacking privity with the principal contractor on two notices rather than one, but does not otherwise restrict the class by counting steps in the same way. Washington conditions its bond on payment of laborers, mechanics, subcontractors and material suppliers, and of persons supplying provisions and goods for the carrying on of the work. Reading the governing statute rather than assuming the federal pattern is the only reliable method, as the comparison in little Miller Acts and where they diverge from the federal rule shows.

Establishing position before it matters

Position in the chain should be settled at the start of a project, not when payment stops. Two steps do most of the work. The first is obtaining the bond and the prime contract, which agencies are directed to furnish to persons who supplied labor or material on the project. The second is confirming how the party immediately above in the chain is engaged, since that classification fixes the claimant's own tier.

Documentation supports both steps. Purchase orders and subcontracts that state plainly whether the counterparty is performing a portion of the work or supplying goods reduce the later dispute, and a short written confirmation of the chain, naming the prime contractor, the subcontractor and the claimant's own customer, is useful evidence months later when the same facts are contested. Retaining delivery records tied to the specific project serves the same purpose, since a claimant must show the labor or material was furnished in carrying out that contract and not another.

Where the answer places a party outside the protected class, the alternatives should be arranged before delivery rather than after. Those include security from the customer, a guarantee from the prime contractor, and the payment mechanisms discussed in joint check arrangements and what they prove. Where the answer places a party in the second tier, the controlling obligation becomes the notice described in the notice a remote claimant must give, and failure to serve it correctly ends the claim as surely as being outside the class.