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 Minnesota Payment Bonds?
A Minnesota payment bond protects a construction project owner (the bond’s “obligee”) against the property being encumbered by mechanic’s liens when a contractor (the bond’s “principal”) fails to subcontractors and/or suppliers. They give unpaid subcontractors and suppliers another way to obtain payment for the labor or materials they have contributed to a construction project. The contractor is legally obligated to pay valid claims against a payment bond.
Who Needs Them?
Minnesota’s “Little Miller Act,” the state’s version of the federal Miller Act, is officially known as the “Public Contractors’ Performance and Payment Bond Act.” You’ll find it in Sections 574.26 to 574.32 of the Minnesota Statutes. This legislation mandates payment bonds from contractors chosen for contracts valued at more than $175,000. Providing a payment bond in an amount equal to or greater than the contract price is a prerequisite for entering into a contract for a public works project.
Although privately funded construction projects are not governed by Minnesota’s Little Miller Act, private project owners often choose to require payment bonds from their contractors to prevent mechanic’s liens.
How Do Minnesota Payment Bonds Work?
Every Minnesota payment bond is legally binding on the obligee, the principal, and a third party—the bond’s guarantor (referred to as the “surety”). The principal is legally obligated to pay valid claims, but the surety guarantees that they will be paid by agreeing to lend the principal the necessary funds.
When a claim is received, the surety first makes sure it’s legitimate, and then pays it on the principal’s behalf. This is an extension of credit that creates a debt the principal must subsequently repay according to the surety’s credit terms. In many cases, those credit terms permit the principal to make installment payments on the debt for a specified period of time. If not repaid, the surety is likely to initiate legal debt collection action against the principal.
How Much Do They Cost?
Minnesota payment bonds are sold for a premium, which is the product of multiplying the bond amount by the premium rate. The obligee sets the bond amount based on the contract price. And the surety assigns the premium rate through underwriting. The primary underwriting concern is credit risk—the risk of the principal not repaying the debt resulting from the surety paying a claim on the principal’s behalf. The standard measure of credit risk is the principal’s personal credit score.
Someone with a high credit score has a good track record for paying debts and is considered a low risk to the surety, resulting in a low premium rate. However, someone with a low credit score lacks the resources and/or financial responsibility to be considered creditworthy, so the premium rate will need to be higher to offset the elevated credit risk.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
Call Us Today
Our surety bond professionals will help you grow your revenue by maximizing your surety capacity. Call us today!