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What Are Iowa Performance Bonds?
Iowa performance bonds serve two key functions in protecting construction project owners against financial harm stemming from a contractor’s default or failure to complete a job according to contract specifications:
They obligate contractors to meet certain performance standards in compliance with statutory requirements and contract specifications.
They provide a way to compensate a project owner (the “obligee” requiring the bond) for the monetary damages caused by a contractor (the bond’s “principal”) who has violated the terms of the construction contract.
Who Needs Them?
Iowa’s “Little Miller Act,” the state’s version of the federal Miller Act, requires performance bonds (and payment bonds) from contractors chosen for state-funded projects valued in excess of $25,000. The threshold for purchasing a performance bond may be lower in some cases at the contracting official’s discretion. All performance bonds must be in an amount equal to 75% of the full contract value.
Although Iowa’s Little Miller Act does not apply to privately funded construction projects, many private project owners require them, particularly for larger projects.
How Do Iowa Performance Bonds Work?
There is a third party to an Iowa performance bond in addition to the obligee and the principal. This third party is the bond’s guarantor (known as the “surety”).
When an obligee files a claim against a performance bond, the surety decides whether it is valid. The principal is legally obligated to pay a valid claim, but the surety has guaranteed the payment of claims. Therefore, the surety pays the claimant on behalf of the principal, and the principal must repay the resulting debt to the surety. Not repaying the debt is practically an invitation for the surety to initiate a lawsuit to recover the funds.
How Much Do They Cost?
The surety calculates the annual premium for an Iowa performance bond by multiplying the bond amount and the premium rate. While the obligee establishes the required bond amount based on project value, the surety assigns the premium rate based on the perceived risk presented by the particular bond applicant. The biggest risk for the surety is not being repaid for a claim paid on behalf of the principal. The bond applicant’s personal credit score is the universal measure of that risk.
An individual with a high credit score presents little or no risk to the surety and would be assigned a correspondingly low premium rate. However, a low credit score is evidence of higher 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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