Minnesota Performance Bonds
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What Are Minnesota Performance Bonds?
Minnesota 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?
Minnesota's “Little Miller Act,” the state’s version of the federal Miller Act, requires performance bonds (and payment bonds) from contractors to be awarded public works projects valued in excess of $25,000. The bond amount is established at the discretion of the obligee based on the contract value.
Privately funded construction projects are not regulated by Minnesota’s Little Miller Act. But, private project owners often require performance bonds, particularly for high-value projects.
How Do Minnesota Performance Bonds Work?
Minnesota performance bonds are legally binding on the obligee, the principal, and a third party—the bond’s guarantor (known as the “surety”). While the principal is legally obligated to pay any claim the surety finds to be valid, the surety has guaranteed payment. Therefore, the surety will pay a valid claim initially as an extension of credit to the principal. The principal must then repay the surety in accordance with the surety’s credit terms. Repayment is not optional. The surety can take the principal to court if that’s what it takes to recover the debt.
How Much Do They Cost?
The annual premium for a Minnesota performance bond is the product of multiplying the bond amount (established by the obligee) by the premium rate. The surety sets the premium rate on a case-by-case basis through risk assessment. The primary risk is that the surety might not be repaid for the credit extended to the principal in paying a claim on the principal’s behalf. The principal’s personal credit score is the usual measure of that risk.
A high credit score means the risk of the surety not being repaid is low, which results in a low premium rate. A low credit score means the risk is higher, 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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