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 payment bond needs.
What Are Maryland Payment Bonds?
Maryland payment bonds serve the important purpose of preventing the encumbrance of property by mechanic’s liens when a contractor fails to pay subcontractors or suppliers. A payment bond protects a construction project owner (the bond’s “obligee”) against mechanic’s liens by providing a way for subcontractors and suppliers to get paid for the labor and/or materials they have provided. The bond legally obligates the contractor (the bond’s “principal”) to pay the valid claims of unpaid subcontractors and suppliers.
Who Needs Them?
Maryland’s “Little Miller Act,” the state’s version of the federal Miller Ac, is found in the Maryland Code under State Finance and Procurement Title 17, Subtitle 1. It establishes the statutory requirement for contractors to furnish a payment bond before they can enter into a contract for a public works project valued in excess of $100,000. The bond amount must be equal to 50% of the contract value.
Private construction projects aren’t governed by Maryland’s Little Miller Act. But many private project owners choose to require payment bonds from the contractors they hire to avoid the possibility of mechanic’s liens.
How Do Maryland Payment Bonds Work?
A Maryland payment bond is a legally binding agreement among the obligee, the principal, and the bond’s guarantor (called the “surety”). Although the legal obligation to pay valid claims belongs to the principal alone, the surety guarantees their payment by lending the principal the money to pay them if need be.
To resolve a valid claim quickly, the surety will pay it on the principal’s behalf. The principal must then repay the resulting debt in accordance with the surety’s credit terms. The surety has the right to take the principal to court to recover the debt if it is not repaid.
How Much Do They Cost?
The premium you will pay for a Maryland payment bond will be calculated by multiplying two factors: the dollar amount of the bond and the premium rate as a percentage. The obligee sets the bond amount based on the contract value, while the surety assigns the premium rate through underwriting.
The primary underwriting goal is to determine the premium rate needed to offset the risk of the surety not being repaid for the credit extended to the principal in paying a claim. That risk is assessed on the basis of the principal’s personal credit score.
A bond applicant with a high credit score is considered to be of little risk to the surety, which deserves a low premium rate. However, a low credit score is of greater concern, and the premium rate will be higher 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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