Surety Bond Professionals is a family owned and operated bonding agency with over 75 years of experience. With access to a broad range of surety markets, our expert agents are ready to assist with all of your payment bond needs.
What Are Hawaii Payment Bonds?
Construction project owners are at risk of having their property encumbered by mechanic’s liens if the contractors they hire fail to pay subcontractors and suppliers. Payment bonds protect project owners against mechanic’s liens by giving unpaid subcontractors and suppliers another way to obtain the money they are owed for the labor or materials they have provided.
Who Needs Them?
Hawaii’s “Little Miller Act,” the state’s version of the federal Miller Act, is found in the Hawaii Revised Statutes, chapter 103F. It establishes the requirement for construction contractors to furnish payment bonds before entering into a public works contract valued in excess of $25,000. The payment bond must be in an amount equal to 100% of the contract value.
Privately funded construction projects are not subject to Hawaii’s Little Miller Act. But many private project owners want the financial protection that payment bonds provide, and therefore require them from the contractors they choose, particularly for larger projects.
How Do Hawaii Payment Bonds Work?
Every Hawaii payment bond establishes a legally binding agreement among three parties: the project owner (known as the “obligee”), the contractor (the “principal”), and the bond’s guarantor (the “surety”). A payment bond places the legal obligation to pay valid claims from unpaid subcontractors or suppliers entirely on the principal.
The surety, as the guarantor, will lend the principal the money needed to pay a valid claim. In fact, the surety will pay it on the principal’s behalf and give the principal some time to repay the resulting debt. But be aware that failing to repay it according to the surety’s credit terms is likely to get you sued by the surety, who is indemnified by the terms of the payment bond. If that happens, you could end up paying court costs and legal fees for both parties in addition to the debt owed to the surety.
How Much Do They Cost?
How much you will pay as the premium for a payment bond is calculated by multiplying two factors—the bond amount required by the obligee and the premium rate set by the surety. While the bond amount is based on the construction project’s value, the premium rate is based on an underwriting assessment of the risk of the surety not being repaid for claims paid on the principal’s behalf. This is referred to as credit risk and is measured by the principal’s personal credit score.
There is little credit risk involved in extending credit to a bond applicant with a high credit score, so the premium rate will be low. But a low credit score calls for a higher premium rate to offset the greater credit risk.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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