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 payment bond needs.
What Are North Carolina Payment Bonds?
North Carolina payment bonds are surety bonds that protect construction project owners against the financial liability and mechanic’s liens resulting from contractors not paying subcontractors or suppliers in accordance with the construction contract. Payment bonds enable unpaid subcontractors and suppliers to obtain compensation without encumbrance of the project owner’s property.
Who Needs Them?
North Carolina’s Little Miller Act, the state’s version of the federal Miller Act, requires payment bonds for publicly funded construction projects valued in excess of $50,000. The payment bond must be in an amount equal to 100% of the contract price. Consult the North Carolina General Statutes, specifically Chapter 44A, Articles 2 and 3, for more information.
The Little Miller Act does not apply to privately funded construction projects. But many private project owners seeking protection against mechanic’s liens choose to require payment bonds, particularly for high-value projects.
How Do North Carolina Payment Bonds Work?
A North Carolina payment bond forms a legally binding agreement among three parties, each with certain rights and responsibilities. In the language of surety bonds, these parties are known as:
- the “obligee” (the project owner protected by the bond),
- the “principal” (the contractor furnishing the bond and obligated to pay all valid claims), and
- the “surety” (the party guaranteeing the bond and agreeing to extend credit to the principal for the purpose of paying claims).
Here’s a quick overview of how payment bonds work:
- The obligee determines the payment bond amount, and the surety assigns an appropriate premium rate on a case-by-case basis.
- The surety processes each claim received, ensuring its validity and paying it as an extension of credit to the principal if necessary.
- The principal must repay the resulting debt according to the surety’s credit terms.
- If not repaid, the surety takes legal action against the principal to recover the funds.
How Much Do They Cost?
North Carolina payment bonds are sold for a premium that is calculated by multiplying the bond amount by the premium rate. The premium rate reflects the surety’s assessment of the risk of not being repaid for claims paid on the principal’s behalf. That assessment is based on the principal’s personal credit score.
It’s considerably less risky to extend credit to someone with a high credit score than to a credit-challenged individual. Low risk deserves a low premium rate, while high risk calls for a higher premium rate to offset the elevated risk level.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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