Surety Bond Professionals is a family owned and operated bonding agency with over 30 years of experience. With access to a broad range of surety markets, our expert agents are ready to assist with all of your construction bond needs.
What Are They?
Colorado performance bonds help ensure that contractors operating within the state comply with applicable state and local regulations governing construction work. They provide important protection for project owners, who have a lot at stake and could suffer significant financial losses due to a contractor’s nonperformance.
A Colorado performance bond not only imposes certain legal requirements on the contractor who purchased it. It also provides a way for the project owner to be compensated for monetary damages resulting from the contractor’s unlawful or unethical business practices.
Who Needs Them?
Under the federal Miller Act and Colorado’s “Little Miller Act,” purchasing a performance bond is mandatory for contractors working on government-funded public works projects valued at more than $100,000. Increasingly, private project owners are also requiring performance bonds, often in conjunction with a payment bond.
How Do They Work?
A Colorado performance bond is a legally binding contract among three parties with very different interests and roles. In the jargon of the surety bond industry, these are the “obligee,” the “principal,” and the “surety.”
- The obligee is the project owner requiring the bond and protected by it. The obligee establishes the required bond amount, which is also referred to as the bond’s “penal sum.” This typically is equal to the total contract price and is the maximum amount that will be paid out on a claim.
- The principal is the contractor required to purchase the bond to protect the obligee. The legal obligation to pay valid claims rests entirely with the principal.
- The surety is the party guaranteeing the bond by agreeing to lend the principal money if needed for the payment of a valid claim. The surety also sets the premium rate a given principal will pay when purchasing a Colorado performance bond.
When a claim is received, the surety will investigate the situation and decide whether the claim is valid and must be paid. If it is, the usual practice is for the surety to pay the claimant directly, which creates a debt that the principal must then repay to the surety. The initial payment of the claim does not let the principal off the hook. It simply shifts the principal’s obligation from paying the claim to repaying the surety. Failing to do so according to the surety’s terms can result in the surety suing the principal to recover the debt.
What Do They Cost?
The annual premium for a Colorado performance bond is calculated by multiplying the bond’s penal sum by the premium rate set by the surety through an underwriting process. That process assesses the risk of the surety not being repaid for claims paid on the principal’s behalf.
The underwriting metric for this kind of risk is the principal’s personal credit score. A principal with a high credit score presents a low risk of non-repayment, which deserves a low premium rate. However, a principal with a low credit score will be assigned a higher premium rate to offset the higher risk to the surety.
A well-qualified principal typically will pay a premium rate in the range of 0.5% to 3%.
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