Update on the Construction Industry Challenges to the New Davis Bacon Federal Regulations
April 30, 2024
In this edition of Surety Today: The Blog, we will provide an update on the status of the law suits that have been filed by various parties in the construction industry seeking to overturn the new regulations issued by the federal government regarding the Davis Bacon Act.
New Davis Bacon Act Regulations
On October 31, 2023, our Surety Today Blog post addressed the new Davis Bacon Act (“DBA”) regulations that recently became effective and their impact on sureties. On November 14, 2023, our Blog post discussed the construction industries response to the new DBA regulations. By way of background, the Department of Labor (“DOL”) published final regulations on August 23, 2023 (88 Fed. Reg. 57526-57747) which became effective on October 23, 2023 imposing new changes to critical components of the DBA regulations.
The first area of concern for sureties, and source of many potential problems, can be found in the new definition of “contractor.” 29 CFR 5.2. The new regulations define “contractor” extremely broadly as “any individual or other legal entity that enters into or is awarded a contract . . . including any prime contract or subcontract of any tier under a covered prime contract.” Id. (emphasis added). In addition, the term contractor now “includes any surety that is completing performance for a defaulted contractor pursuant to a performance bond.” Id. (emphasis added).By including a performing surety in the definition of contractor, the takeover surety may now be bound to adhere to all of the regulations that refer to the “contractor” in the DBA and its regulations. This new definition may now require a performing surety to comply with all of the record keeping, reporting, compliance, withholding and enforcement provisions of the DBA. It may also expose the surety (now contractor) to the debarment, liquidated damages and False Claims Act provisions of the DBA.
Another new definition in the regulations that also presents a potential problem for sureties is the expanded definition of “prime contractor.” 29 CFR 5.2. Under the new regulations, prime contractor now includes “any person or entity that enters into a contract with an agency” . . . and “the controlling shareholders or members of any entity holding a prime contract, the joint venturers or partners in any joint venture or partnership holding a prime contract, and any contractor (e.g., a general contractor) that has been delegated the responsibility for overseeing all or substantially all of the construction anticipated by the prime contract.” Id. For the purposes of the DBA “any such related entities holding different prime contracts are considered to be the same prime contractor.” Id. In conjunction with this new definition, the regulations now allow the withholding of contract funds for DBA violations across agencies and for any contracts in which the expanded “prime contractor” is involved. See 29 CFR 5.5(a)(2)(i). The cross-withholding regulations greatly extends the reach of the DOL under the DBA. Now, imagine that a surety has a principal that is a prime contractor on a bonded job, and that same principal has other related entities that are the “prime contractor” on another project (or 5, 10 or 20 projects), through joint ventures or other affiliations, that are bonded by different sureties. The DOL then withholds funds on your bonded contract because of an alleged failure to pay on one or more of the other projects. This will create many issues between the surety and its principal and its affiliated entities and those other sureties, especially if your principal has gone out of business.
The new regulations now provide that the DOL “has priority to funds withheld or to be withheld . . . over claims to those funds by: (A) A contractor’s surety(ies), including without limitation performance bond sureties and payment bond sureties.” 29 CFR 5.5(a)(2)(ii). Thus, if a surety completes a project and tries to collect the contract balance, but instead the DOL steps in and withholds some or all of those remaining funds because of an alleged DBA violation of the principal or a subcontractor on the bonded project, or, now, even another project because of a principal’s affiliated entity – the DOL will now have priority to the funds. There are many, many other changes that affect not only sureties, but the construction industry as a whole.
Construction Industry Litigation
As we reported in our November, 2023 blog post, on November 7, 2023, the Associated Builders and Contractors Association and others filed suit in the United States District Court for the Eastern District of Texas, Case No. 1:23-cv-00396 seeking an injunction against enforcement of the new regulations. In addition, on the same date, the Associated General Contractors of America Association and others also filed suit seeking an injunction against certain of the new regulations in the United States District Court for the Northern District of Texas, Case No. 5:23-cv-00272-C.
In the AGC Litigation in the Northern District of Texas, the AGC filed an Amended Complaint on December 18, 2023 and on March 26, 2024 the AGC filed a Motion for Preliminary Injunction, which has been scheduled for a hearing on June 10, 2024. The Injunction Motion asserts that certain of the new rules impermissibly contradict the language of the DBA, that the new rules are arbitrary and capricious and an abuse of discretion and that the new rules violate the Regulatory Flexibility Act. On March 27, 2024, the government filed a Motion to Dismiss claiming a lack of jurisdiction and Article III standing. The AGC has opposed the Motion.
In the ABC Litigation pending in the Eastern District of Texas, the ABC filed an Amended Complaint on February 21, 2024. On March 20, 2024, the government filed a partial Motion to Dismiss asserting a lack of jurisdiction and standing. The ABC has opposed the Motion. While the ABC Amended Complaint seeks injunctive relief, the ABC has not filed an injunction motion as of this date.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.