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What Are Alabama Payment Bonds?
Alabama payment bonds protect construction project owners against liens on their property if a contractor fails to pay subcontractors or suppliers. Instead of launching a lawsuit that results in a mechanic’s lien, a subcontractor or supplier that has not been paid must file a claim against the payment bond the contractor (known as the “principal”) has furnished the project owner (the bond’s “obligee”). The principal is legally obligated to pay all valid claims from unpaid subcontractors or suppliers.
Who Needs Them?
Alabama’s “Little Miller Act,” the state’s version of the federal Miller Act, is found in the Alabama Code, Title 39, chapter 1, under “Performance and Payment Bonds on Public Works.” It establishes bonding requirements for construction projects funded by the state or any political subdivision, such as a city or county. All such public works projects valued in excess of $50,000 require a payment bond in an amount equal to 50% of the project’s value.
Private construction projects don’t fall under Alabama’s Little Miller Act. However, many private project owners choose to protect their property against mechanic’s liens by requiring payment bonds from contractors.
How Do Alabama Payment Bonds Work?
The bond’s guarantor (the “surety”) is the third party to an Alabama payment bond, in addition to the obligee and the principal. The surety guarantees that all valid claims will be paid by agreeing to extend credit to the principal for that purpose if necessary.
The surety typically honors that guarantee by paying a valid claim on the principal’s behalf. That payment taps into the line of credit established for the principal at the time the payment bond was purchased. The principal must then repay that debt in accordance with the surety’s credit terms. Failing to do so can result in the surety initiating legal debt recovery proceedings against the principal.
How Much Do They Cost?
The premium for a Nevada payment bond is the result of multiplying the required bond amount (established by the Obligee) by the premium rate. The surety assigns each principal an appropriate premium rate based on the credit risk that guaranteeing the payment of claims entails. Credit risk is the risk of not being repaid for claims paid on behalf of the principal, which is measured using the principal’s personal credit score.
A principal with a high credit score has a long history of financial responsibility and poses a low risk to the surety. Low risk deserves a low premium rate. A low credit score, however, means the risk level is higher, which warrants a higher premium rate.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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