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?
Payment bonds play an important role in the construction industry. A payment bond is a contractor’s guarantee to pay subcontractors and suppliers in accordance with contractual terms and conditions. Without that guarantee, contractors experiencing cash flow problems might not prioritize payments to subcontractors and suppliers, and work on the project could grind to a halt. In the event of nonpayment, the injured party can file a claim against the contractor’s payment bond.
Who Needs Them?
In Florida, contractors must furnish a payment bond in order to be awarded a state-funded construction contract for more than $100,000. This is a requirement under the state’s “Little Miller” Act, Florida’s version of the federal Miller Act of 1935, which mandates payment bonds for federally funded construction projects.
Increasingly, private project owners require payment bonds as a strategy for preventing unpaid subcontractors or suppliers from acquiring an ownership interest in their property through a mechanic’s lien.
How Do They Work?
A Florida payment bond is a legally binding contract among three parties—the project owner, the contractor, and the bond’s guarantor—known respectively as the “obligee,” the “principal,” and the “surety.” Each of these parties has different roles and responsibilities.
- The obligee requiring the bond establishes the bond amount, also known as the bond’s “penal sum.” This is the maximum amount that will be paid out on claims.
- The principal is legally obligated to pay all valid claims.
- The surety determines whether a claim is valid and guarantees that valid claims will be paid. This guarantee is in the form of agreeing to extend credit to the principal for the purpose of paying claims.
Upon receipt of a claim against a Florida payment bond, the surety initiates an investigation to ensure that the claim is legitimate and must be paid. Unless the principal is able to come up with the cash immediately, the surety will pay the claimant directly, which creates a debt that the principal must then repay to the surety.
In effect, the principal’s legal obligation to pay a valid claim is transformed into the legal obligation to repay the loan from the surety. Failure to repay the surety can result in the surety taking legal action against the principal.
What Do They Cost?
The annual premium cost for a Florida payment bond depends on two main factors: the required bond amount established by the obligee and the premium rate assigned to the principal by the surety.
The surety sets the premium rate through an underwriting assessment of the risk that the principal won’t repay the surety for claims paid on the principal’s behalf. The underwriters will take a close look at the principal’s financial condition and creditworthiness, as measured by their personal credit score. The assumption is that someone who has demonstrated financial responsibility will continue to do so.
A high credit score is a good sign that the risk of the surety not being repaid is low, which warrants a low premium rate. A low credit score signals higher risk, which results in a higher premium rate.
A well-qualified principal typically will be assigned a premium rate in the range of one to three percent.
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