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What Are Iowa Payment Bonds?
An Iowa payment bond prevents a construction project owner’s property from being encumbered by mechanic’s liens due to a contractor’s failure to pay subcontractors and suppliers. The payment bond protects the project owner (the bond’s “obligee”) against financial harm and legally obligates the contractor (the bond’s “principal”) to pay valid claims filed by unpaid subcontractors and suppliers.
Who Needs Them?
Iowa’s “Little Miller Act,” the state’s version of the federal Miller Act, requires contractors to provide a payment bond as a condition for entering into a public works contract in excess of $25,000. The payment bond amount must be equal to 100% of the contract value. The relevant statute can be found in Chapter 573 of the Iowa Code.
Private construction projects do not fall under the Iowa Little Miller Act. Nonetheless, many private project owners require payment bonds so as to avoid having mechanic’s liens placed on their property when a contractor fails to pay subcontractors and/or suppliers.
How Do Iowa Payment Bonds Work?
There is another party to an Iowa payment bond—the bond’s guarantor, known as the “surety.” The surety guarantees the payment of valid claims by agreeing to lend the principal the funds to pay them, if necessary. As a matter of fact, the surety will pay the claimant directly, creating a debt the principal must subsequently repay in accordance with the surety’s credit terms. Failing to repay the surety will most likely trigger legal debt recovery proceedings against the principal.
How Much Do They Cost?
The premium for an Iowa payment bond is the product of multiplying the bond amount (determined by the obligee) by the premium rate (set by the surety). The bond amount is tied to the value of the construction job, while the premium rate is based on the surety’s assessment of the risk of not being repaid for claims paid on behalf of the principal. The underwriters measure this risk based on the principal’s personal credit score.
A high credit score means there is little risk to the surety, which makes a low premium rate appropriate. However, a higher premium rate is assigned to a principal with a low credit score to offset the higher risk.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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