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What Are Delaware Payment Bonds?
The purpose of Delaware payment bonds is to protect construction project owners against mechanic’s liens being placed on their property. This can happen when subcontractors and suppliers have not been paid for deliverables by the prime contractor according to contractual requirements.
A payment bond ensures that subcontractors and suppliers are compensated for their labor and materials without financial harm to the project owner (called the bond’s “obligee”). The bond legally obligates the contractor (the bond’s “principal”) to pay valid claims filed against the payment bond by the unpaid parties and indemnifies the surety.
Who Needs Them?
The official name of Delaware’s “Little Miller Act,” the state’s version of the federal Miller Act, is the Delaware Public Works Contractor Registration Act. You’ll find the details in title 29, chapter 69, subchapter 111 of the Delaware Code.
The statute requires prime contractors, selected for publicly funded construction projects with their size or value set by the Advisory Council, to furnish a payment bond in an amount equal to 100% of the contract value. A payment bond is required before a contractor can enter into a public works contract with the state or one of its political subdivisions (county, city, etc.).
Although private construction projects are not subject to the Delaware Little Miller Act, private project owners may decide to require payment bonds to protect their property against mechanic’s liens.
How Do Delaware Payment Bonds Work?
A Delaware payment bond is legally binding on the obligee, the principal, and a third party, known as the “surety.” This is the bond’s guarantor.
The legal obligation to pay valid claims belongs exclusively to the principal. But the surety guarantees their payment by lending the principal the funds to pay a claim up to the full bond amount.
However, the surety doesn’t simply write a check to the principal. Rather, the surety pays the claim on the principal’s behalf. The principal’s obligation to pay thus becomes an obligation to repay the surety. If the principal does not repay that debt according to the surety’s credit terms, the surety can initiate legal debt recovery procedures.
How Much Do They Cost?
The premium cost of a Delaware payment bond varies depending on the surety’s perception of the credit risk involved. This is the risk of a borrower not repaying a lender—in this case, the risk of the principal not repaying the surety for a claim paid on the principal’s behalf. Credit risk is assessed based on the principal’s personal credit score, and the surety assigns an appropriate premium rate.
A principal with a high credit score is regarded as a low risk, which deserves a low premium rate. Conversely, a principal with a low credit score poses greater credit risk, 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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