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What Are Kansas Payment Bonds?
A Kansas 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?
Kansas’s “Little Miller Act” is the state’s version of the federal Miller Act and is codified in the Kansas Statutes, Annotated Chapter 60, Article 11, Section 60-1111. It requires contractors selected for public works projects valued in excess of $100,000 to provide a payment bond as a condition for entering into a contract with the state or one of its political subdivisions. The payment bond amount must be the same as the full contract value.
The Little Miller Act applies only to state-funded construction work, not to private construction projects. Still, private project owners also need protection against mechanic’s liens and have the option of requiring payment bonds from the contractors they hire.
How Do Kansas Payment Bonds Work?
In addition to the obligee and principal, there is a third party to a Kansas payment bond—the bond’s guarantor, referred to as the “surety.” The surety’s guarantee is an agreement to lend the principal the funds to pay valid claims if need be.
The surety will first ensure that a claim is valid and then pay the claimant directly on the principal’s behalf. This extension of credit must then be repaid by the principal, according to the surety’s credit terms. The surety is likely to initiate legal debt recovery action against a principal who does not make full repayment.
How Much Do They Cost?
Kansas payment bonds are sold for a small percentage of the required bond amount, that percentage being the premium rate. While the bond amount is established by the obligee based on the contract value, the premium rate is set by the surety based on an assessment of the credit risk. Credit risk refers to the risk of a borrower not repaying a lender—in this case, the risk of the surety not being repaid for claims paid on the principal’s behalf.
The underwriters measure credit risk on the basis of the principal’s personal credit score. A high credit score gives the surety confidence that the credit risk is low, which results in a low premium rate. However, extending credit to someone with a low credit score is a riskier proposition, warranting 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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