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 performance bond needs.
What Are Indiana Performance Bonds?
Indiana performance bonds are a class of surety bonds that protect construction project owners against financial losses caused by a contractor’s default or failure to complete a job according to contract specifications. They obligate contractors to meet certain performance standards.
When a contractor fails to perform as required, the contracting authority or project owner (the performance bond’s “obligee”) can seek compensation for monetary damages by filing a claim against the bond furnished by the contractor (known as the “principal”).
Who Needs Them?
Indiana’s “Little Miller Act,” the state’s version of the federal Miller Act, requires performance bonds from contractors chosen for state-funded projects valued in excess of $200,000 or lower at the contracting official’s discretion. All performance bonds must be in an amount equal to the full contract value. (The Little Miller Act also mandates payment bonds.)
There’s no law requiring performance bonds for privately-funded construction projects. Nevertheless, it’s not unusual for private project owners to require one from their contractor, especially for larger projects.
How Do Indiana Performance Bonds Work?
Indiana performance bonds are legally binding on the three parties involved—the obligee, the principal, and a third party known as the ‘surety.” This is the bond’s guarantor.
If the obligee files a claim against a performance bond, it’s the surety that decides whether it is valid and approves it for payment. Although the principal is legally obligated to pay a valid claim, as the bond’s guarantor, the surety will pay it on the principal’s behalf.
That payment is an extension of credit to the principal and must be repaid in accordance with the surety’s credit terms. Not repaying the debt usually leads to the surety initiating the legal debt recovery process.
How Much Do They Cost?
Two factors determine the annual premium for an Indiana performance bond: the bond amount and the premium rate. The obligee establishes the required bond amount, and the surety assigns the premium rate based on an underwriting assessment of the risk to the surety. The primary risk is that of the surety not being repaid for the credit extended in paying a claim on behalf of the principal. That risk is measured using the principal’s personal credit score.
A high credit score is associated with minimal risk to the surety, which deserves a low premium rate. Conversely, a low credit score is evidence of higher risk, which calls for 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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