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 Montana Payment Bonds?
Montana payment bonds serve the important purpose of protecting construction project owners against financial liability and mechanic’s liens caused by a contractor’s failure to pay subcontractors and suppliers for the labor and supplies they have provided. Payment bonds give subcontractors and suppliers a way to obtain payment without resorting to encumbering the project owner’s property with mechanic’s liens.
Who Needs Them?
Montana’s “Little Miller Act,” the state’s version of the federal Miller Act, requires payment bonds for all public works contracts, regardless of the contract price. Under certain circumstances, the state or any of its political subdivisions can waive the requirement for a payment bond. For projects at the state level, the payment bond must be in the full amount of the contract. Municipal requirements may vary, but payment bonds at the local level must be for at least 25% of the full contract amount.
Detailed information about payment bond thresholds and amounts can be found in Montana Code Annotated, sections 18-2-201 to 18-2-208.
Montana’s Little Miller Act does not apply to privately funded construction projects, but private project owners also want to prevent mechanic’s liens. Many require the contractors they hire to provide payment bonds, particularly for high-value projects.
How Do Montana Payment Bonds Work?
There are three parties to every Montana payment bond:
- the project owner requiring the bond (known as the “obligee”),
- the contractor purchasing the bond (the “principal”), and
- the bond’s guarantor (the “surety”).
Under the terms of the payment bond agreement, these parties have different rights and responsibilities:
- The obligee establishes the payment bond amount, which is tied to the contract value.
- The principal is legally obligated to pay all claims the surety determines to be valid.
- The surety sets the premium rate and agrees to extend credit to the principal by paying a valid claim on the principal’s behalf if necessary.
- The principal must repay the credit extended in paying a claim according to the surety’s credit terms. (The surety can initiate legal debt recovery actions if not repaid.)
How Much Do They Cost?
The premium for a Montana payment bond is the result of multiplying the bond amount established by the obligee by the premium rate assigned by the surety. The premium rate will be high enough to offset the credit risk associated with extending credit to the principal. (Credit risk is the risk of a borrower not repaying a lender.) The surety’s risk assessment is based on the principal’s personal credit score.
A high credit score is reliable proof of low credit risk, which makes a low premium rate appropriate. On the other hand, a lower credit score calls for a higher premium rate to offset the greater risk to the surety.
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!