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What Are Nevada Payment Bonds?
Nevada construction project owners can find their properties encumbered by mechanic’s liens if their contractors fail to pay subcontractors or suppliers according to contractual terms. A Nevada payment bond protects a project owner (the bond’s “obligee”) by allowing an unpaid entity to file a claim for payment against the bond rather than pursue a mechanic’s lien on the property. The contractor (known as the bond’s “principal”) is legally obligated to pay valid claims filed within a certain time period following project completion.
Who Needs Them?
Nevada’s “Little Miller Act” (found in the Nevada Revised Statutes, Chapter 339, under “Public Works Contracts”) is the state’s version of the federal Miller Act. It requires contractors to purchase a payment bond in order to enter into a public works contract valued in excess of $100,000. The payment bond amount must be equal to 50% of the project value, or even more, at the discretion of the obligee.
The Little Miller Act does not apply to private construction projects. Nevertheless, many private projects choose to require payment bonds to protect their property against mechanic’s liens.
How Do Nevada Payment Bonds Work?
A Nevada payment bond is a legally binding agreement involving three parties: the obligee, the principal, and the bond’s guarantor (the “surety”). As the guarantor, the surety agrees to extend credit to the principal up to the full amount of the bond to provide the funds for paying valid claims. The surety establishes a line of credit for that purpose at the time the principal purchases the payment bond.
Once the surety has confirmed the validity of a claim, the surety will pay it directly. That payment creates a debt that the principal must repay according to the surety’s credit terms. Not being repaid by the principal can trigger legal action by the surety to recover the debt.
How Much Do They Cost?
The premium for a Nevada payment bond is the result of multiplying the required bond amount (established by the Obligee) by the premium rate. The surety assigns each principal an appropriate premium rate based on the credit risk that guaranteeing the payment of claims entails. Credit risk is the risk of not being repaid for claims paid on behalf of the principal, which is measured using the principal’s personal credit score.
A principal with a high credit score has a long history of financial responsibility and poses a low risk to the surety. Low risk deserves a low premium rate. A low credit score, however, means the risk level is higher, which warrants 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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