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 Michigan Payment Bonds?
Michigan payment bonds serve the important purpose of protecting construction project owners against the financial fallout from a contractor’s failure to pay subcontractors and/or suppliers. They specifically prevent mechanic’s liens against the property of the project owner (the bond’s “obligee”) by providing another way for unpaid subcontractors and suppliers to obtain payment for the labor or materials they have provided. The contractor (the “principal”) is legally obligated to pay valid claims against a payment bond.
Who Needs Them?
Michigan’s “Little Miller Act” is the state’s version of the federal Miller Act and is codified in the sections of the Michigan Compiled Laws that govern public construction contracts. The Little Miller Act requires payment bonds for state-funded contracts exceeding $50,000. Each payment bond must be in an amount equal to the full contract value, ensuring protection for labor and material suppliers.
The Little Miller Act does not govern private construction contracts. Nevertheless, many private project owners choose to require them from their contractors to prevent mechanic’s liens against their properties.
How Do Michigan Payment Bonds Work?
The third party to a Michigan payment bond, in addition to the obligee and the principal, is the bond’s guarantor (called the “surety”). Although the legal obligation to pay valid claims belongs exclusively to the principal, the surety guarantees payment by agreeing to extend credit to the principal for that purpose. The surety determines the validity of claims received.
The surety will initially pay a valid claim as an extension of credit to the principal. The principal must repay the resulting debt according to the surety’s credit terms. It’s common for those credit terms to give the principal some time to repay the surety in installments over time. Failing to repay the surety can lead to legal debt collection proceedings against the principal.
How Much Do They Cost?
Two factors go into the calculation of the premium for a Michigan payment bond: the bond amount and the premium rate. The bond amount is based on the contract value, while the surety establishes the premium rate through an assessment of the credit risk involved. (Credit risk is the risk of a borrower not repaying a lender.) Credit risk is measured by the principal’s personal credit score.
A high credit score is considered strong evidence of a low risk to the surety, resulting in a low premium rate. Conversely, a low credit score is a reliable sign of greater credit risk, which must be offset by 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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