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 Massachusetts Payment Bonds?
Massachusetts payment bonds prevent mechanic’s liens against a property if a contractor fails to pay subcontractors and/or suppliers. With a payment bond in place, a subcontractor or supplier who has not been paid can file a claim against the bond and be compensated by the contractor (known as the bond’s “principal”). The principal is legally obligated to pay valid claims filed within a certain time period following project completion. This protects the project owner (the bond’s “obligee”) against having the property encumbered by liens.
Who Needs Them?
Massachusetts’s “Little Miller Act” (found in the Massachusetts General Laws, Chapter 149, under “Public Works Bond Requirements”) is the state’s version of the federal Miller Act. It requires contractors to furnish a payment bond as a condition for entering into a contract for a state-funded construction project valued in excess of $5,000 that involves the repair, remodeling, demolition, or construction of facilities. Contracts of $3,000 or more for any other public works project also require a payment bond. In both cases, the payment bond amount must be equal to 100% of the project value.
The Little Miller Act does not apply to privately-funded construction projects. But it’s not unusual for private project owners to require payment bonds to protect the property against mechanic’s liens.
How Do Massachusetts Payment Bonds Work?
A Massachusetts payment bond is legally binding on all three parties: the obligee, the principal, and the bond’s guarantor (the “surety”). The surety guarantees the payment of valid claims by agreeing to extend credit to the principal up to the full amount of the bond for the purpose of paying them.
Once the validity of a claim has been verified, the surety will pay a claim, tapping into the line of credit established for the principal at the time the payment bond was purchased. The surety’s credit terms spell out the conditions for the principal’s repayment of the funds. Not being repaid by the principal can cause the surety to take legal action to recover the debt.
How Much Do They Cost?
The premium for a Massachusetts payment bond is determined by multiplying the bond amount by the premium rate. The premium rate, set by the surety through underwriting, is based on the risk of guaranteeing the payment of claims. This credit risk, the risk of not being repaid for claims paid on the principal’s behalf, is measured by the principal’s personal credit score.
A high credit score is reliable evidence of low risk to the surety, which results in a low premium rate. A low credit score, however, warrants a higher premium rate to offset the greater risk.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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