BNUMBER:  B-230871.4
DATE:  June 19, 1996
TITLE:  [Letter]

**********************************************************************

B-230871.4

June 19, 1996

Mr. Brad J. Hutchinson
18386 Carob Street
Hesperia, California  92345

Dear Mr. Hutchinson:

This responds to your request on behalf of Mark Steel Corporation, 
Fire Engineering Co., Inc., Insulated Building Products, Inc., J. W. 
Thompson Co., Peterson & Associates, Inc., and Data Air, Inc., that 
our Office consider referring their claims to the Congress under the 
Meritorious Claims Act, 31 U.S.C.  sec.  3702(d).

These firms were subcontractors of Continental Construction 
Corporation (CCC) under National Aeronautics and Space Administration 
(NASA) contract No. NAS2-12863 for the construction of a 112,000 
square foot aircraft testing facility at NASA's Dryden Flight Research 
Center in Edwards, California.  The claimants are among a number of 
CCC's subcontractors who remained unpaid when NASA terminated the 
contract with CCC for default on March 2, 1989.  Some weeks later, 
when CCC's performance and payment sureties also defaulted on their 
obligations, the subcontractors and NASA were left without recourse to 
recover their losses.  A report issued on February 22, 1991, by NASA's 
Office of Inspector General (IG) recounted the many problems NASA 
experienced with the contract, highlighting in particular problems 
with the sureties.  Citing the IG report and the Meritorious Claims 
Act you request that we recommend to the Congress that the firms be 
fully compensated.  For the reasons set forth below, we cannot make 
such a recommendation.  

Facts

At $16,184,800, CCC was the low bidder on the test facility 
construction contract.  NASA conducted a preaward survey of CCC and 
found it to be responsible.  The preaward survey uncovered the 
problems that later plagued the contract:  CCC's inexperience and cash 
flow.  However, in the judgment of the contracting officer, these 
problems were not sufficient at the time of the survey to affect the 
firm's overall responsibility.[1]   

The contract was awarded on October 23, 1987.  CCC offered individual 
sureties for the performance and payment bonds mandated by the Miller 
Act, 40 U.S.C.  sec.  270a.  As required by the regulations in effect at 
the time, each surety submitted a sworn statement listing the property 
offered as security for the obligations.  See Federal Acquisition 
Regulation (FAR)  sec.  28.202-2 (1987).  In addition, those statements 
were certified by bank officers who stated that they had personal 
knowledge of the individuals and the assets pledged.  NASA reviewed 
the documentation evidencing the sureties' net worth, but the 
contracting officer did not independently verify the existence and 
value of the sureties' property.[2]  The contracting officer accepted 
the sureties offered on the bonds and on November 2, issued CCC a 
notice to proceed. 

Between November 1987 and February 1989, CCC completed about half of 
the project and was paid over $10 million in progress payments.  In 
late February 1989, CCC abandoned the project and advised NASA that it 
was unable to complete the contract.  NASA then terminated the 
contract for default.  Thereafter, one of the performance sureties 
briefly and unsuccessfully attempted to complete the construction 
project, but that contract, too, was terminated for default on April 
19, 1989.  The other surety denied responsibility on June 12.  NASA 
subsequently completed the construction of the test facility at 
considerable additional cost.  

After the sureties' default, the government attempted to take 
possession of the assets they pledged as security for their 
performance and payment obligations.  It was then that NASA learned 
that the assets were either nonexistent or otherwise unavailable to 
meet the sureties' obligations.  As a result, no recovery was obtained 
for either the government or the unpaid subcontractors.  The two 
individual sureties were later convicted on criminal charges relating 
to false statements in connection with the bonds.

There exist a number of unpaid subcontractors including the six 
claimants in this case.  While it appears that they had causes of 
action against CCC, the letter to our Office does not indicate whether 
any of them pursued their rights under the contract.  If they did, 
apparently, they did not recover any money.  We are unaware of actions 
taken, if any, by those who did not join the request to our Office.

The six claimants in this case and amount of the claims they submitted 
to our Office are listed below:

     Mark Steel             $506,221
     Fire Engineering       $234,432    
     Peterson Associates    $264,477
     Data Air               $ 49,713
     J.W. Thompson          $ 69,800
     Insulated Building Products $250,612

Miller Act

The Miller Act requires contractors performing government construction 
contracts to post acceptable surety bonds to insure completion of the 
work and the payment of subcontractors.  A performance bond protects 
the government's interest by providing a source of funds to complete 
the contract in the event of default.   A payment bond assures payment 
to all persons supplying labor or materials.  The bond is provided in 
lieu of mechanics' liens, which are not recognized on government 
contracts.  For contracts valued over $5 million, the amount of the 
payment bond is set by the statute at $2,500,000.  40 U.S.C.  sec.  
270a(a)(2).  While corporate sureties are more common, the regulations 
permit individuals to act as sureties for Miller Act performance and 
payment bonds.  See FAR  sec.  28.203.

In general, Miller Act payment bonds provide the sole fund available 
for the satisfaction of debts to subcontractors on government 
construction contracts.  Thus, subcontractors under government 
contracts may not proceed against the government.  Farmington 
Manufacturing Co., B-186817, Sept. 17, 1976, 76-2 CPD  para.  255.  The 
reasoning behind the rule is that a subcontractor's direct contractual 
relationship is with the prime contractor, not the government.  In the 
absence of a direct contractual relationship, known as "privity of 
contract," a subcontractor may not attempt to enforce the prime 
contract for its benefit.  Vern Willard, B-210544, March 14, 1983, 
83-1 CPD  para.  277.  Therefore, our Office has no legal basis upon which 
to consider the claims.  However, you request that we refer the claims 
to the Congress under the Meritorious Claims Act.

Meritorious Claims Act

Under the Meritorious Claims Act we may refer to the Congress a claim 
that deserves consideration because of substantial legal or equitable 
reasons but would otherwise not be payable.  John H. Teele, 65 Comp. 
Gen. 679 (1986).  The cases we have reported to Congress generally 
have involved equitable circumstances of an unusual nature that are 
unlikely to constitute a recurring problem.  See Major Gerald A. 
Lechliter, B-236008, May 7, 1991.  The rationale for this practice is 
that recurring problems are best dealt with by general remedial 
legislation.

As you point out, we recently referred a claim concerning a similar 
situation to Congress under the Meritorious Claims Act.  B-203871.3, 
August 19, 1993.  That matter, like the one currently before us, 
concerned the nonpayment of subcontractors under a federal 
construction contract where both the prime contractor and the 
individual Miller Act sureties failed to honor their obligations.  As 
in this case, the contracting agency's IG issued a report critical of 
the agency's acceptance of the sureties' affidavits, its award of the 
prime contract, and its reaction to poor performance by the prime 
contractor. 

While it is indeed unfortunate that the claimants here are involved in 
a similar scenario, we do not believe that it would be appropriate for 
our Office to report these claims to the Congress as meritorious 
claims.  As this case illustrates, such problems have occurred 
numerous times in the past and may well occur in the future.  The 
continued referral to Congress of Miller Act bond claims such as these 
could create a de facto privity of contract between subcontractors and 
the government and result in liability on the part of the government 
where there currently is none.  See Naval Facilities Engineering 
Command, 57 Comp. Gen. 176, 77-2 CPD  para.  510 (1977), and Bob Bates, 
B-204165, Jan. 8, 1982, 82-1 CPD  para.  25, reconsideration denied, 
B-205165.2, Mar. 8, 1982, 82-1 CPD  para.  209, where our Office did not 
report to the Congress claims of subcontractors who were left without 
recourse because of faulty or nonexistent Miller Act bonds.  If 
Congress believes as a matter of public policy that this long standing 
rule of law should be changed for federal construction contracts, it 
may of course enact legislation amending the Miller Act to do so.  We 
do not think that it would be appropriate for our Office to assume a 
policy role by referring to the Congress repetitive Miller Act bond 
claims.

Accordingly, we decline to report the subcontractors' claims to the 
Congress under the Meritorious Claims Act.

Sincerely yours,

Robert P. Murphy
General Counsel

B-230871.4

June 19, 1996

DIGEST

Claimants, subcontractors on defaulted construction contract, suffered 
a loss when the prime contractor's individual sureties also defaulted 
on Miller Act payment bonds.  Claimants' request referral of  their 
claims to Congress for payment under the Meritorious Claims Act.  We 
decline to refer the claims.  Defaults by individual sureties will 
occur from time to time.  Remedial legislation is the appropriate 
vehicle for correcting recurrent problems such as defaulted sureties.  
Repeated referrals of subcontractors' claims would establish a policy 
that contravenes the Miller Act, which provides that surety bonds are 
the sole source of funds for subcontractor payment claims.  See 
statutes and decisions cited.

1. Since CCC was a small business, had the contracting officer 
concluded that CCC was not responsible, the matter would have been 
referred to the Small Business Administration (SBA) for final 
determination under the SBA's certificate of competency procedures.  
See 15 U.S.C.  sec.  673(b)(7).

2. The regulations did not require the contracting officer to verify 
independently the information concerning the sureties' net worth.  See 
FAR  sec.  28.202-2 (1987).