New Jersey Performance Bonds

New Jersey Performance Bonds

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 performance bond needs. 

What Are New Jersey Performance Bonds?

New Jersey performance bonds are surety bonds designed to compensate construction project owners for financial harm experienced when a contractor fails to complete a job according to contract specifications—or doesn’t complete it at all. Contract default can be quite costly if it becomes necessary to bring in another contractor to see the job through to a satisfactory completion.

Who Needs Them?

Under New Jersey's “Little Miller Act,” performance bonds are required from contractors selected for public works and other state-funded projects valued in excess of $200,000. (They must furnish payment bonds as well.) The performance bond must be for an amount equal to the contract price.  

The Little Miller Act does not apply to private construction projects. But it’s not uncommon for private project owners to require performance bonds, particularly for bigger contracts.

How Do New Jersey Performance Bonds Work?

There are three parties to a New Jersey performance bond:

  • The state or local contracting authority or private project owner requiring the bond (known as the “obligee”)
  • The contractor purchasing the bond (the ‘principal”)
  • The party guaranteeing the bond (the “surety”)

The legal obligation to pay valid claims belongs entirely to the principal. And the surety guarantees to provide the funds for that payment by agreeing to extend credit to the principal for that purpose. The surety is indemnified against any legal responsibility for the claim.

So, the normal practice is for the surety to pay the claim initially as an extension of credit to the principal. The principal must subsequently repay that debt according to the surety’s credit terms or face legal action by the surety to recover the funds.

How Much Do They Cost?

The annual premium cost of a New Jersey performance bond is a small percentage of the bond amount (also known as the bond’s “penal sum’). The surety determines what that percentage, the premium rate, will be through an underwriting assessment of the risk. The main risk to the surety is not being repaid for the credit extended in paying a claim on the principal’s behalf.

The measure of risk used by the surety is the principal’s personal credit score.  A high credit score means that the risk to the surety is low, and that calls for a low-interest rate. By the same token, a low credit score is a strong indication of elevated risk, 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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