Public and Private Sector Construction: Differences that Contractors Should Know

By Sara M. Bour, Esq., AIA Contract Documents, Manager and Counsel

The Federal government’s recent passing of the Infrastructure Investment and Jobs Act is expected to boost the U.S. construction industry. This infrastructure bill is aimed to provide funding to a range of public construction projects. If you’re considering expanding your construction practice to public works, or if you’re new to the construction industry, you should prepare yourself for the differences between public and private sector construction. Though they both involve improvements to property, contractors’ methods, means, restrictions, and obligations may be vastly different, depending on the sector. Below are some important differences between public and private construction that contractors should be aware of when considering entering public construction.

1.     Applicable Law and Regulations.

For all construction projects, contractors should know the laws and contract terms (including flow-down provisions) impacting their performance. In the public sector, however, the number of relevant laws that may apply to your project is likely more than you’re accustomed to. The industry is highly regulated to ensure proper and timely performance, and avoid misuse of taxpayer funds. Depending on the project’s function, funding, agency, and jurisdiction, contractors may be subject to a variety of federal, state, and local laws, as well as regulations promulgated by separate administrations and departments. Creating an exhaustive list of these laws would be nearly impossible, but knowing where to look can lead to success.

To start, many public contracts reference governing acts and statutes. These laws should be read and fully understood by all parties. To facilitate this, many governmental entities make resources available online, including detailed explanations of applicable laws. The Federal government also regularly posts and updates Executive Orders on the White House’s official webpage, which can directly impact contractors and their ongoing performance. Contractors should do their homework in contacting local agencies and performing their own research to collect as much information as possible about the rules and regulations that apply to their public works project.

2.     Prompt Payment Acts and Statutory Interest.

Generally, parties can look to the contract to determine how and when payment will be made. In the public sector, payment may be mandated through Prompt Payment Acts. Depending on the jurisdiction, owners and contractors alike may be required to make payment within a designated timeframe. For example, the Federal Prompt Payment Act requires the government to pay prime contractors within 14 days of receiving a proper payment request.[1] Similarly, prime contractors are required to pay their subcontractors and suppliers within 7 days of receiving payment.[2] Federal law also imposes a penalty of statutory interest when payment is not made when it is due.[3]

3.     Funding.

On public projects, funding may come from a diverse pool of public resources. Depending on the project’s type and agency, funding may derive from local, state, or federal levels, or a combination thereof. For example, construction on national thoroughfares or public crossings may be funded by the Federal Highway Administration (FHWA), Federal Railroad Administration (FRA), and the relevant state department of transportation.

Knowing a project’s funding source is important for contractors when considering public construction. Not all public projects have available funds from the start. Rather, the project may be periodically funded throughout construction. Depending on the agency, funding procedures may involve several channels and mechanisms, and total project funding may require significant time. These time periods may need to be factored into the contractor’s bid. Be sure to investigate where the public funds derive from, and understand how the funding approval process works.

4.     Prequalified Bidders.

In the public sector, contractors may need to prequalify to bid on the project. Prequalification allows for determination of the contractor’s capacity to complete the work. The prequalification process differs based upon the governing agency and location of the project. Generally, however, contractors must complete a prequalification application and provide information about the firm, such as its corporate structure, past performance, employees, licensure, financial status, and claims. Contractors may also need to take further action to register with the governing agency to submit a bid. For example, federal contractors may need to register with the System for Award Management (SAM) prior to bidding.[4] Be sure that you are aware of all prequalification procedures prior to preparing a bid to avoid unexpected issues before the project begins.

5.     Statutorily Required Surety Bonds.

On private projects, bonding requirements, such as the surety bond’s terms and its penal sum, will typically be stipulated between the parties. On public projects, governing law mandates whether contractors must procure surety bonds. On federal projects, bonding requirements are set forth in the Miller Act, and on state projects, the state’s Little Miller Act, as well as the corresponding regulations. Under the Miller Act, prime contractors with a contract valued over $100,000 are required to furnish both payment and performance bonds.[5] The Federal Acquisition Regulation (FAR) provide alternatives to payment bonds for contracts valued between $25,000 and $100,000.[6] Each state’s Little Miller Act bonding requirements vary, so be sure to review these statutes when preparing a bid on a project.

Compared to private projects, public works are owned and used by the public. To protect the public’s interest, liens against public property are generally prohibited. Surety bonds act as assurance to the government, subcontractors, and vendors that the prime contractor’s payment and performance obligations will be fulfilled.

6.     False Claims.

No matter whether you’re performing work in the private or public sector, submitting a false claim for payment will result in significant consequences. Many jurisdictions have enacted False Claims Acts to combat against fraud at the government’s expense. These Acts generally allow for civil actions against contractors who submit false or fraudulent claims for payment. Examples of false claims may include a knowing exaggeration of the numbers on a payment application, or a contractor delivering less than what was bargained for. If found to be in violation, contractors may be held responsible for substantial damages and legal costs, among other consequences. The penalties for violating these Acts are not a trivial issue, as the Department of Justice recovered over $2.2 Billion from False Claims Act cases in the fiscal year 2020.[7]

The differences between public and private sector construction are vast. Depending on the jurisdiction, funding, type of work, and agencies involved, contractors may be subject to many different statutory requirements and regulations. This article addresses only a handful of commonalities when working in the public sector. It is important to do your research before bidding on a public project to ensure success down the road.

AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.  

[1] 48 C.F.R. § 52.232-27(a)(1)(i)(A) (West). [2] 48 C.F.R. § 52.232-27(c)(1) (West). [3] 48 C.F.R. §§ 52.232-27(a)(3)-(6); 48 C.F.R. § 52.232-27(c)(2)-(3) (West). [4] See, i.e., 48 C.F.R. § 4.1100, et seq. (West); 48 C.F.R. § 52.204-7 (West). [5] 40 U.S.C. § 3131 et seq. (West). [6] 40 U.S.C. § 3132 (West). [7] Justice Department Recovers Over $2.2 Billion from False Claims Act Cases in Fiscal Year 2020 | OPA | Department of Justice