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What Are Nebraska Payment Bonds?
Nebraska 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?
Nebraska’s Little Miller Act, the state’s version of the federal Miller Act, mandates a payment bond equal to the contract price for contracts valued in excess of $15,000. This applies to labor performed, materials furnished, and rental of equipment used in the construction, repair, or improvement of public structures for Nebraska or any political subdivision. (In some local jurisdictions, the threshold contract value for requiring a payment bond may be as low as $10,000.) Specific statutes can be found in the Nebraska Revised Statutes, Chapter 52, §§52-118 to 52-118.02.
Although privately funded construction projects are not subject to Nebraska’s Little Miller Act, many private project owners choose to require payment bonds, especially for larger projects.
How Do Nebraska Payment Bonds Work?
Nebraska payment bonds are legally binding on these three parties, which have different rights and responsibilities:
- the project owner requiring the bond (called the “obligee”),
- the contractor required to purchase the bond (the “principal”), and
- the bond’s guarantor (the “surety”).
Under the terms of the payment bond agreement, the usual practice looks like this:
- The obligee determines the payment bond amount as a specific percentage of the contract value, and the surety assigns an appropriate premium rate.
- The principal is legally obligated to pay all valid claims.
- The surety determines whether a claim is legitimate and pays a valid claim on the principal’s behalf if necessary.
- The principal repays the resulting debt according to the surety’s credit terms.
- If not repaid, the surety initiates debt recovery actions against the principal.
How Much Do They Cost?
The premium for a Nebraska payment bond is the result of multiplying two factors—the bond amount set by the obligee and the premium rate assigned by the surety. The premium rate is based on the credit risk to the surety (the risk of not being repaid for claims paid on the principal’s behalf) as measured by the principal’s personal credit score.
A principal with a high credit score presents little credit risk, resulting in a low premium rate. On the other hand, the higher risk indicated by a low credit score warrants a higher premium rate to offset it.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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