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 Maryland Performance Bonds?
Maryland performance bonds provide essential protection for construction project owners against financial losses caused by a contractor’s default or failure to complete a job according to contract specifications.
When a contractor (the bond’s “principal”) fails to perform in compliance with statutory and contractual requirements, the contracting entity or project owner (the bond’s “obligee”) can file a claim against the performance bond. If the claim is found to be valid, the obligee will be compensated for monetary damages resulting from the principal’s noncompliance.
Who Needs Them?
The requirements established as Maryland’s “Little Miller Act,” the state’s version of the federal Miller Act, are captured in the State Finance and Procurement Statutes. They require performance bonds (and payment bonds) from contractors before they can be awarded a contract for public works projects valued in excess of $100,000. Generally speaking, performance bonds must be in an amount equal to 50% of the contract value.
Privately funded construction projects are not subject to Maryland’s Little Miller Act. But, private project owners may require performance bonds from their contractors, especially for high-value projects.
How Do Maryland Performance Bonds Work?
Maryland performance bonds are legally binding on the obligee, the principal, and a third party—the bond’s guarantor (known as the “surety”). Upon receipt of a claim, the surety decides whether it is legitimate. The principal is legally obligated to pay a valid claim. But having guaranteed the payment of valid claims, the surety will pay it on the principal’s behalf.
That payment is an extension of credit to the principal. Like any other creditor, the surety must be repaid in accordance with its specified credit terms. The surety can take legal action against the principal to recover the debt, if necessary.
How Much Do They Cost?
The annual premium for a Maryland performance bond is the product of multiplying the bond amount by the premium rate. The obligee establishes the required bond amount. The surety assigns the premium rate through an assessment of the risk that the surety might not be repaid for the credit extended to the principal. The principal’s personal credit score is the widely accepted measure of that risk.
A high credit score is strong evidence of low risk to the surety, which deserves a low premium rate. On the other hand, a low credit score is a red flag for greater risk, resulting in 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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