Michigan Performance Bonds
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 Michigan Performance Bonds?
Michigan 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 formal name of Michigan's “Little Miller Act,” the state’s version of the federal Miller Act, is the “Michigan Public Works Bond Act of 1963.” It requires performance bonds (and payment bonds) from contractors selected for public works projects valued in excess of $50,000. The bond amount generally must be an amount equal to 25% of the contract value but may be higher at the discretion of the contracting agency.
Privately funded construction projects do not fall under Michigan’s Little Miller Act. But, private project owners may require performance bonds from their contractors, particularly for high-value projects.
How Do Michigan Performance Bonds Work?
Michigan performance bonds are legally binding on the obligee, the principal, and a third party—the bond’s guarantor (the “surety”). The principal is legally obligated to pay any claim the surety deems valid. However, the surety has guaranteed the payment of valid claims and will pay it initially as an extension of credit to the principal. The principal must then repay the resulting debt in accordance with the surety’s credit terms. The surety can take the principal to court to recover the debt, if necessary.
How Much Do They Cost?
The annual premium for a Michigan performance bond is calculated by multiplying the bond amount (established by the obligee) by the premium rate. The surety assigns the premium rate through an assessment of the risk of the surety not being repaid for a claim paid on behalf of the principal. The principal’s personal credit score is widely used as the measure of that risk.
A high credit score is strongly correlated with low risk to the surety, so the premium rate will be low as well. On the other hand, a low credit score is a reliable sign of greater risk, which calls for 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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