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What Are Massachusetts Performance Bonds?
Massachusetts performance bonds protect construction project owners against the financial fallout from a contractor’s failure to complete a job in full compliance with contractual specifications and legal requirements. The bond purchased by a contractor (known as the bond’s “principal”) provides funds to compensate the project owner (the “obligee” requiring the bond) for the cost of getting the job finished properly by hiring another contractor to complete the job, for example.
Who Needs Them?
Massachusetts’s “Little Miller Act” is the commonwealth’s version of the federal Miller Act, which establishes certain bonding requirements for federally funded construction projects.
Massachusetts requires contractors to furnish a performance bond for any state or local public works project valued above $5,000 that involves construction, alteration, repair, remodeling, or demolition of facilities or over $2,000 for all other construction-related work. A performance bond must be for an amount equal to the project’s value. (A payment bond is required as well.)
The Little Miller Act does not apply to private construction projects. But many private project owners require performance bonds, particularly for higher value projects, to protect themselves and their investors.
How Do Massachusetts Performance Bonds Work?
A Massachusetts performance bond is a legally binding agreement among three parties: the obligee, the principal, and the bond’s guarantor (referred to as the “surety”).
If and when the obligee experiences a financial loss covered by the performance bond and files a claim, the surety will investigate to determine its validity. The principal is legally obligated to pay a valid claim, but the surety has guaranteed its payment. In fact, the surety has agreed to extend credit to the principal to make sure the claimant is properly compensated and will pay the claim on the principal’s behalf.
That payment creates a debt the principal owes to the surety and must repay in accordance with the surety’s credit terms. The surety’s recourse, if not repaid, is to sue the principal, who will then end up owing not only the original debt but also court costs and legal fees, including the surety’s.
How Much Do They Cost?
The annual premium for a Massachusetts performance bond is calculated by multiplying two figures—the bond amount and the premium rate assigned to the principal by the surety through underwriting. The underwriters review the principal’s work history and financial documents to ensure that the principal is qualified to handle the job. They also assess the risk of the surety not being repaid for claims paid on behalf of the principal, based largely on the principal’s personal credit score.
Someone with a high credit score has demonstrated financial responsibility and poses little risk of non-repayment, so the premium rate will be low. However, a low credit score indicates 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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