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 Arizona Performance Bonds?
Arizona performance bonds are designed to protect state or local contracting authorities against financial losses that can result from a contractor’s failure to complete a job in accordance with plans, specifications, and conditions set forth in the contract. The performance bonding requirement is established by Arizona’s “Little Miller” Act, the state’s version of the federal Miller Act that mandates performance and payment bonds for federally-funded construction projects.
Who Needs Them?
According to Arizona’s Revised Statutes, a performance bond is required before the execution of any contract for “the construction, alteration, or repair of any public building, a public work or improvement of any county, city or town, or officer, board or commission thereof, and irrigation, power, electrical, drainage, flood protection and flood control districts, tax levying public improvement districts, and county or city improvement districts.” By law, each performance bond must be in an amount equal to 100% of the project’s total value.
While performance bonds are not required by law for privately funded construction projects, many private project owners also require performance bonds from their contractors to protect themselves and their investors against financial loss.
How Do Arizona Performance Bonds Work?
There are three parties to an Arizona performance bond:
- the obligee (the party requiring the bond),
- the principal (contractor) required to purchase the bond, and
- the surety guaranteeing the bond.
While the principal is legally obligated to pay all valid claims, the surety determines whether a claim is valid and guarantees that the principal will pay it if it is. That guarantee is in the form of an agreement to extend credit to the principal for the purpose of paying the claim if that becomes necessary. In practice, the surety will pay the claim on the principal’s behalf and then be repaid by the principal.
If the surety has to sue the principal to recover the debt, the principal will also be required to pay court costs and the surety’s legal fees.
How Much Do They Cost?
Arizona performance bonds are subject to underwriting. The surety’s main concern is the risk associated with extending credit to the principal, so the premium rate for the bond will depend largely on the principal’s personal credit score. Multiplying the required bond amount by the premium rate determines the annual premium for an Arizona performance bond.
The higher the principal’s credit score, the lower the risk of the surety not being repaid for claims paid on the principal’s behalf. Because the risk to the surety is low, the premium rate will be low. Someone with a low credit score poses a greater risk, so the premium rate will be higher.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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