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 North Carolina Performance Bonds?
North Carolina performance bonds protect construction project owners against the financial losses that can occur when a contractor fails to complete a job according to contract specifications.
A performance bond helps ensure that contractors comply with regulatory and contractual requirements. They also ensure that funds will be available to compensate the project owner for monetary damages when violations do occur.
Who Needs Them?
North Carolina’s “Little Miller Act,” the state’s version of the federal Miller Act, is known officially as the North Carolina Public Contracts Act. It requires contractors chosen for public works projects valued in excess of $300,000 to purchase performance bonds (and payment bonds) in an amount equal to 100% of the contract value.
Private construction projects are not subject to this mandate. Still, it’s not uncommon for private project owners to require performance bonds from their contractors, especially when the project value is high.
How Do North Carolina Performance Bonds Work?
North Carolina performance bonds involve three parties:
- The public contracting entity or private project owner ( the bond’s “obligee”),
- The contractor (the “principal”), and
- The bond’s guarantor (the “surety”).
Upon receipt of a claim, the surety determines whether it is valid. If it is, the principal is legally obligated to pay it. However, as the bond’s guarantor, the surety has agreed to extend credit to the principal if necessary for the purpose of paying a valid claim.
The surety initially pays the claim on the principal’s behalf. The principal must then repay the resulting debt according to the credit terms established by the surety. If the debt is not repaid, the surety can take legal action to recover the funds.
How Much Do They Cost?
The premium for a North Carolina performance bond is calculated by multiplying the bond amount by the premium rate. The obligee establishes the required bond amount, and the surety assigns a premium rate that reflects the risk of agreeing to extend credit to the principal.
The most serious risk is that the principal might not repay the credit extended by the surety in paying a claim on the principal’s behalf. The principal’s personal credit score is the standard measure of the risk of non-repayment.
A high credit score is regarded as evidence of a low risk level, which makes a low premium rate appropriate. A low credit score is a reliable sign of greater 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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