Illinois Performance Bonds
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What Are Illinois Performance Bonds?
Illinois performance bonds protect construction project owners against the substantial costs they can incur when a contractor defaults or otherwise fails to complete a job in accordance with contract specifications. They hold contractors to certain standards and provide a way for project owners to seek compensation for monetary damages.
Who Needs Them?
Illinois's “Little Miller Act,” formally referred to as the Public Construction Bonds Act, is the state’s version of the federal Miller Act. It requires performance bonds from contractors chosen for state-funded projects valued in excess of $50,000. (There is also a statutory requirement for payment bonds.) The required bond amount is set by the contracting authority on a case-by-case basis.
Performance bonds are not mandated by law for private construction projects, regardless of their estimated value. But, many private project owners require one from their contractor, particularly for critical and high-value contracts.
How Do Illinois Performance Bonds Work?
Illinois performance bonds are legally binding on the three parties involved, who are known in the lingo of surety bonds as:
- The “obligee” (the public contracting authority or private project owner requiring the bond)
- The “principal” (the contractor purchasing the bond)
- The “surety” (the bond’s guarantor)
The obligee can file a claim seeking compensation for financial harm resulting from a contractor’s unlawful or unethical actions. If the surety finds the claim to be valid, the principal is legally obligated to pay it. But the surety, as the bond’s guarantor, will pay it on the principal’s behalf as an extension of credit for that specific purpose.
The principal’s legal obligation shifts to the obligation to repay the surety. Not doing so will most likely result in the surety initiating a lawsuit to reclaim the debt and the principal having to repay not only the debt to the surety but also court costs and legal fees.
How Much Do They Cost?
The obligee sets the bond amount, and the surety assigns the premium rate. Multiplying the two yields the annual premium for an Illinois performance bond.
The underwriters use the principal’s personal credit score as the measure of the risk of the surety not being repaid for claims paid on the principal’s behalf. A high credit score means the risk to the surety is low, and a low score signals higher risk. The premium rate is proportional to the risk level. Low risk merits a low premium rate, and high risk warrants a higher rate.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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