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What Are New Mexico Payment Bonds?
Without a payment bond, a construction project owner can find their property encumbered by mechanic’s liens if a contractor fails to pay subcontractors or suppliers. Purchasing a payment bond for the financial protection of a project owner (the bond’s “obligee”) gives unpaid subcontractors another form of recourse. These injured parties can file a claim against the payment bond furnished by the contractor (known as the bond’s “principal”). The principal is legally obligated to pay all valid claims within a certain time period following project completion.
Who Needs Them?
The official name of New Mexico’s “Little Miller Act,” the state’s version of the federal Miller Act, is the New Mexico Public Works Minimum Age Act. The relevant text is found in the Annotated New Mexico General Statutes, Chapter 4, section 4-59-1.
The law requires contractors to furnish a payment bond as a condition for entering into a contract for any state-funded construction project valued in excess of $25,000. The required amount of a payment bond is 100% of the project value.
The Little Miller Act doesn’t apply to private construction projects. Still, private project owners have the option of requiring payment bonds from their contractors to eliminate the risk of mechanic’s liens.
How Do New Mexico Payment Bonds Work?
A New Mexico payment bond brings together three parties in a legally binding agreement: the obligee, the principal, and the bond’s guarantor (the “surety”). The surety guarantees the payment of valid claims by agreeing to lend the principal the necessary funds to pay them.
The usual practice is for the surety to investigate each claim and decide whether it is valid and, therefore, must be paid. The surety will pay a valid claim as an extension of credit to the principal. The surety’s credit terms dictate the repayment schedule. If the principal fails to repay the debt, the surety can initiate legal action to recover the funds.
How Much Do They Cost?
The premium you will pay for a New Mexico payment bond is a small percentage of the bond amount. That percentage, the premium rate, is assigned by the surety through an underwriting risk assessment. The primary risk is credit risk—the risk of the surety not being repaid for the credit extended to the principal in paying a claim on the principal’s behalf. Credit risk is normally measured based on the principal’s personal credit score.
The risk presented by a principal with a high credit score is minimal, which calls for a low premium rate. A higher premium will be assigned to a principal with a low credit score to offset the greater credit risk.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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