Nevada Performance Bonds
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What Are Nevada Performance Bonds?
Nevada performance bonds provide construction project owners assurance that they won’t be stuck with the cost of bringing in a new contractor or taking other measures to get a construction job completed if the original contractor defaults or otherwise fails to perform in accordance with contract specifications and legal requirements.
When such situations arise, the bond provides a way to compensate the project owner (known as the obligee) for the resulting monetary damages. The protection afforded by a Nevada performance bond does not extend to anyone other than the obligee.
Who Needs Them?
Nevada's “Little Miller Act,” establishes bonding requirements for certain construction projects funded by state or municipal contracting authorities. A performance bond is required for every project with an estimated value in excess of $100,000. (A payment bond is also required for such projects.) The performance bond must be for an amount equal to at least 50% of the contract price.
The Little Miller Act only applies to public works projects. But many private project owners require performance bonds, particularly for higher value projects, to provide financial protection for themselves and their investors.
How Do Nevada Performance Bonds Work?
The obligee is one of three parties to a Nevada performance bond agreement. The other two are the contractor (the bond’s principal) and the guarantor (called the surety). The bond is legally binding on all three.
The principal is legally obligated to pay any claim the surety determines to be valid. And the surety has guaranteed the payment of claims by agreeing to lend the funds to the principal if necessary. To ensure a swift resolution, the surety will pay the claimant directly, as an extension of credit to the principal. The principal must subsequently abide by the surety’s credit terms and repay the debt accordingly. Not repaying the surety for claims paid on the principal’s behalf is a surefire way for the principal to end up in court, paying court costs and the surety’s legal fees as well as the outstanding debt.
How Much Do They Cost?
Two numbers go into calculating the annual premium for a Nevada performance—the bond amount and the premium rate, which the surety assigns to the principal through underwriting. The underwriters not only examine the principal’s construction history, financial documents, and the contract to verify the principal’s ability to handle the job. They also check the principal’s personal credit score to measure the risk of the surety not being repaid for credit extended to the principal.
A high credit score is evidence of financial responsibility, meaning that the risk to the surety is low. So the premium rate will be low as well. Conversely, a low credit score is a strong sign of higher risk, which calls for 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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