Contractors who work directly for the Commonwealth or for municipalities don’t need payment bonds to secure their payments because public owners are funded by the power of taxation. But there is a catch. No contract awarded by these public owners is enforceable unless the money to fund the contract work is appropriated in advance. Every such contract must contain a certification by the responsible financial official that a sufficient appropriation exists.
Where there is no appropriation, the invariable result is nonpayment to the contractor. It does not matter that the contractor proceeded in good faith, or that it performed work based on assurances from public officials that it would be paid. Nor does it matter that the state agency or municipality received a substantial benefit from the work performed. In the end, the result is the same — nonpayment.
This harsh policy results from the court’s view that the purpose of appropriation statutes is to prevent unlawful expenditure of public funds, which includes all expenditures in excess of appropriations. The courts enforce that statutory purpose by accepting no excuses, and by imposing on contractors dealing with public owners the responsibility to make certain there is a sufficient appropriation to cover the contract before performing the work.
This statutory appropriation requirement also applies to extra work. A contractor who proceeds as directed to perform extra work without confirmation of an adequate appropriation covering that work runs the risk of performing for free. To avoid that risk, every change order should certify the existence of sufficient appropriated funds to pay for the work. The existence of a certified appropriation does not guarantee full payment if the cost of the work exceeds the appropriation. That circumstance is most likely to arise where work is being performed on time and material, or unit price basis. Where the cost of the work reaches the appropriation limit before completion, the contractor’s only remedy is to stop work. If the contractor continues to work it will not be paid no matter how beneficial the work performed is to the public owner.
There is one exception. Appropriation limits do not apply to breach of contract claims. A public owner cannot breach its contract and then refuse to pay damages to the contractor because the damages exceed the original appropriation. The contractor has a right to recover contract damages without worrying about appropriation limits. But that is the only time.
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