Public Works Act Claims
Mechanic's liens are not permitted on city or state projects (or federal - more on that here). We do not want unpaid contractors selling public property at auction through a foreclosure. At the same time, contractors need to be protected. The Public Works Act, also known as a "mini Miller Act", is the solution.
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The Public Works Act.
The Public Works Act, C.R.S. 38-26-101, et seq., applies to all public projects with a contract amount of at least $50,000 or $150,000, depending on the nature of the project. Instead of recording a mechanic's lien against the property improved by the construction professional's work, the claimant files a "verified statement of claim." The verified statement of claim must be filed "with the board, officer, person, or other contracting body by whom the contract was awarded." In response to the verified statement of claim, the governmental entity holds back funds sufficient to cover the amount claimed until the claimant has been paid or the claim is withdrawn. It essentially creates a lien against the contract funds and/or the payment bond.
The contract funds will be released ninety days after final settlement of the project unless the claimant files suit and files a lis pendens "with the person or contracting body by whom the contract was awarded." Claims against the payment bond must be filed no later than six months after the date of completion of the work.
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The remedy is not exclusive. As with the mechanic's lien statute, the Public Works Act does not exclude common law claims such a breach of contract and unjust enrichment. Accordingly, if a contractor fails to comply with the Public Works Act by, for instance, failing to submit a verified statement of claim or filing suit against the bond within the specified time period, other avenues for relief still exist.
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Substituting A Bond.
As with mechanic's liens, the general contractor can substitute a bond to release funds. This process is governed by C.R.S. 38-26-108. The bond must be for 150% of the amount of the verified statement of claim. Once the bond is procured, the general contractor can move ex parte for the substitution. The court will then discharge the verified statement of lien and order that the funds be released. This course of action is usually taken in response to a contractual requirement that such liens and verified statements of claim be immediately removed.
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Trust Fund Claims.
As with the mechanic's lien statute, the Public Works Act has a trust fund provision. C.R.S. 38-26-109 provides: "Any funds disbursed to any contractor or subcontractor under any contract or project subject to the provision of this article shall be held in trust for the payment of any person that has furnished labor, materials, sustenance, or other supplies used or consumed by the contractor in or about the performance of the work contracted to be done or that supplies, laborers, rental machinery, tools, equipment to the extent used in the prosecution of the work where the person" filed or may file a verified statement of claim or bond claim.
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The provision mirrors the language of C.R.S. 38-22-127, discussed here. The concepts are the same. The funds cannot be used for overhead until all subcontractors and suppliers are paid. There is no requirement to have a separate trust account, but there must be separate records of account. There is no requirement to hold in trust funds where there is a good faith belief the verified statement of claim is invalid or there is a setoff or back charge.
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Any person who violates the trust fund requirements commits theft and is liable for three times the amount of the damages plus attorney fees.
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What Happens if The Amount Claimed is Excessive?
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Just like the mechanic's lien statute, there are severe penalties for claiming a knowingly excessive amount. C.R.S. 38-26-110 provides: "Any person who files a verified statement of claim or asserts a claim against a principal or surety that has furnished a bond under this article for an amount greater than the amount due without reasonable possibility that the amount claimed is due and with the knowledge that the amount claimed is greater than the amount due, and that fact is demonstrated in any proceedings under this article, shall forfeit the rights to the amount claimed and shall be liable to [the general contractor, upper tier subcontractor, principal and/or surety on the bond] in an amount equal to all costs and all attorney fees reasonably incurred in bonding over, contesting, or otherwise responding in any way to the excessive verified statement of claim or excessive bond claim." The claimant loses the claim against the contract proceeds or bond and is responsible for all fees and costs necessary to free up the funds.