Delaware Performance Bonds
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What Are Delaware Performance Bonds?
Delaware performance bonds provide financial protection for construction project owners who otherwise would have no way to recoup the losses caused by a contractor’s default or failure to complete a job in accordance with contract specifications. It can cost a project owner a great deal if work must be redone or another contractor has to be brought in to finish the project.
Who Needs Them?
Under Delaware's “Little Miller Act,” performance bonds are required from contractors selected for state-funded public works projects regardless of their size or value. (Payment bonds are required as well.) The performance bond must be for an amount equal to the contract value. No contract can be signed until a performance bond is in place.
Although the state’s Little Miller Act does not apply to private construction projects, many private project owners require performance bonds from their contractors, especially for high-value contracts.
How Do Delaware Performance Bonds Work?
Every Delaware performance bond is legally binding on three parties known as:
- The “obligee” (the project owner requiring the bond)
- The “principal” (the contractor purchasing the bond)
- The “surety” (the bond’s guarantor)
The legal obligation to pay a valid claim belongs exclusively to the principal, though the surety guarantees that it will be paid. Specifically, the surety has agreed to extend credit to the principal if it becomes necessary to pay a claim. But that’s not a simple matter of writing a check to the principal.
Instead, the surety pays the claimant directly on the principal’s behalf. The principal must repay the resulting debt according to the surety’s credit terms. The surety will take legal action to recover the funds owed if the principal fails to repay the debt in full.
How Much Do They Cost?
Calculating the annual premium for a Delaware construction bond is a simple matter of multiplying the bond amount by the premium rate. The obligee establishes the bond amount based on project value, and the surety sets the premium rate through a risk assessment. The particular risk of concern is that the surety might not be repaid for claims paid on behalf of the principal.
The widely accepted measure of that risk is the principal’s personal credit score.
A high credit score is correlated with low risk and a low score with higher risk. The higher the risk, the higher the premium rate will be to offset the elevated risk to the surety.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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