Connecticut Performance Bonds
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What Are Connecticut Performance Bonds?
Connecticut performance bonds serve a very important purpose by providing protection against the financial loss that a construction project owner can experience when a contractor fails to complete a job in accordance with contractual specifications and legal requirements.
Who Needs Them?
Connecticut's “Little Miller Act,” found in the Connecticut General Statutes, is the state’s version of the federal Miller Act governing federally funded construction projects. It requires contractors selected for state and municipal public works projects estimated to be above a certain threshold to furnish a performance bond equal to the full value of the contract. No contract can be signed until the performance bond requirement has been met.
Privately funded construction projects are not subject to the Little Miller Act. However, many private project owners require performance bonds to protect themselves and their investors against the additional costs resulting from a contractor’s failure to perform.
How Do Connecticut Performance Bonds Work?
There are three parties to a Connecticut performance bond:
- the contracting authority or private project owner requiring the bond is known as the obligee,
- the contractor required to furnish the bond is called the principal, and
- the bond’s guarantor is referred to as the surety.
The obligee has the right to file a claim against the performance bond and be compensated for monetary damages as the injured party. The legal obligation to pay a valid claim belongs exclusively to the principal. The surety determines whether a claim is valid or not. If it is, the surety guarantees that it will be paid but is indemnified against any legal responsibility for the claim. In practice, the surety will pay the claimant directly and then be repaid by the principal. If the principal fails to repay that debt, the surety can take legal action to recover the funds.
How Much Do They Cost?
The annual premium for a Connecticut performance bond is determined by multiplying the required bond amount by the premium rate. The bond amount is established by the obligee, but the premium rate is assigned by the surety on a case-by-case basis through underwriting.
For larger bond amounts, underwriting usually includes an examination of the principal’s financial statements and other documents to assess the principal’s ability to complete the job satisfactorily. But the primary underwriting concern in setting the premium rate is the risk of the surety not being repaid for claims paid on the principal's behalf. The risk of non-repayment is measured largely on the basis of the principal’s personal credit score.
A high credit score is the hallmark of a financially responsible person, which means the risk level is low. And low risk results in a low premium rate. However, a low credit score is a red flag for risk, and higher risk 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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