Surety Bond Professionals is a family owned and operated bonding agency with over 75 years of experience. With access to a broad range of surety markets, our expert agents are ready to assist with all of your performance bond needs.
What Are Alabama Performance Bonds?
Alabama performance bonds help maintain the integrity of the construction industry by addressing the potential financial losses construction project owners can incur when a contractor fails to complete a job satisfactorily. Alabama performance bonds serve both preventive and compensatory purposes by legally obligating a contractor (the bond’s “principal”) to:
Complete the construction job in accordance with all applicable statutes and regulations and the terms of the construction contract, or
Compensate the project owner (the bond’s “obligee”) for monetary damages in the event of a violation that results in a financial loss.
Who Needs Them?
Alabama’s “Little Miller Act,” the state’s version of the federal Miller Act, requires performance bonds from contractors awarded state-funded and municipal construction projects valued in excess of $50,000. By law, each performance bond must be in an amount equal to 100% of the project’s total value. Many private project owners also require performance bonds from their contractors, to protect themselves and their investors against financial loss. (Note: payment bonds also may be required.)
How Do Alabama Performance Bonds Work?
There are three parties to an Alabama performance bond—the obligee, the principal, and the bond’s guarantor (the “surety”). The first thing the surety will do upon receipt of a claim for monetary damages is investigate it to ensure that it’s valid. If it is, the principal is legally obligated to pay it.
However, as the bond’s guarantor, the surety will extend credit to the principal and pay the claimant directly. The principal must then repay the surety. Not repaying that debt is very likely going to get the principal sued by the surety to recover the funds.
How Much Do They Cost?
Alabama performance bonds are sold for a premium that is the result of multiplying the full amount of the bond (also known as its “penal sum”) by the premium rate assigned by the surety. The surety’s main concern is the risk associated with extending credit to the principal, which is assessed on the basis of the principal’s personal credit score.
The higher the principal’s credit score, the more confidence the surety has in the person’s financial responsibility. Because the risk to the surety is low, the premium rate will be low. Someone with a low credit score is assumed to have had trouble paying back credit in the past and poses a greater risk. So the premium rate must be higher to offset it.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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