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What Are Mississippi Payment Bonds?
A Mississippi payment bond protects a construction project owner (the “obligee” requiring the bond) against their property being encumbered by mechanic’s liens when a contractor (the bond’s “principal”) fails to pay subcontractors and/or suppliers. Payment bonds ensure that subcontractors and suppliers will receive payment for the labor or materials they have provided. The principal is legally obligated to pay all valid claims against a payment bond.
Who Needs Them?
Mississippi’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 the Mississippi Code Annotated, Title 31, Chapter 5, sections 31-5-51 to 31-5-57. This legislation mandates the purchase of a payment bond for every public construction project with a contract price in excess of $25,000 (non-highway). The project owner has the option of not requiring a payment bond for projects priced below that threshold if the contractor is to be paid in one lump sum upon project completion.
Privately funded construction projects are not subject to Mississippi’s Little Miller Act, but the potential for mechanic’s liens is as much a concern for their owners as it is for government contracting entities. It’s common for private project owners to protect themselves (and their investors) against mechanic’s liens by requiring payment bonds from contractors, especially for larger projects.
How Do Mississippi Payment Bonds Work?
Every Mississippi payment bond is legally binding on three parties: the obligee, the principal, and the bond’s guarantor (referred to as the “surety”). The guarantee of payment actually is a legal agreement to extend credit to the principal to provide the necessary funds. The usual practice is for the surety to verify a claim’s validity and then pay it on the principal’s behalf.
Thus, the principal’s legal obligation to pay a valid claim becomes a legal obligation to repay the surety. The surety’s credit terms often allow repayment in a series of installments. A principal who doesn’t reimburse the surety is likely to become the target of legal debt recovery proceedings.
How Much Do They Cost?
Mississippi payment bonds are sold for a premium that is a small percentage of the required bond amount, that percentage being the premium rate. The bond amount depends on the project’s monetary value. But the premium rate is assigned through an underwriting assessment of the risk that extending credit to the principal entails. The risk of greatest concern is that the principal might not repay the surety for a claim paid on the principal’s behalf. The universally accepted measure of this “credit risk” is the principal’s personal credit score.
A high credit score assures the surety that the credit risk is low, entitling the principal to a low premium rate. With a lower credit score, however, the premium rate will be higher to offset the higher risk level.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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