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What Are North Dakota Payment Bonds?
North Dakota payment bonds prevent mechanic’s liens in the event that a contractor fails to pay subcontractors or suppliers. A payment bond protects the project owner (the bond’s “obligee”) against mechanic’s liens by providing a way for unpaid subcontractors and suppliers to obtain compensation for the labor and/or materials they have provided. The bond legally obligates the contractor (the bond’s “principal”) to pay valid claims filed against it by unpaid subcontractors and suppliers.
Who Needs Them?
North Dakota’s Little Miller Act can be found in the North Dakota Century Code, specifically in Chapter 48-01.2. This set of statutes requires contractors working on public construction projects exceeding $100,000 to secure payment bonds. The required bond amount varies depending on the project value:
- Projects exceeding $100,000 but not exceeding $1 million require a bond equivalent to 50% of the contract value.
- Projects exceeding $1 million but not exceeding $5 million require a bond equal to 40% of the contract value.
- Projects exceeding $5 million require a flat bond rate of $2.5 million.
This law mirrors the federal Miller Act but is specific to state-funded construction projects in North Dakota.
The contracting body will let you know whether or not you will be required to furnish a payment bond for a given state-funded project and, if so, in what amount. The required payment bond amount is a predetermined percentage of the contract value.
Private construction projects aren’t subject to North Dakota’s Little Miller Act. Nevertheless, many private project owners require payment bonds from contractors as protection against encumbrance of their property by mechanic’s liens.
How Do North Dakota Payment Bonds Work?
A North Dakota payment bond brings three parties together in a legally binding agreement—the obligee, the principal, and the bond’s guarantor (called the “surety”). The legal obligation to pay valid claims belongs exclusively to the principal. However, the surety guarantees the payment of claims by extending credit to the principal for the purpose of paying them.
The usual practice is for the surety to pay it on the principal’s behalf and then be repaid by the principal in accordance with the surety’s credit terms. The surety will take legal action to recover the debt if necessary.
How Much Do They Cost?
The premium for a North Dakota payment bond is based on two factors: the bond amount and the premium rate. The obligee establishes the bond amount as a percentage of the contract value, and the surety sets the premium rate for each bond applicant through underwriting.
The premium rate must be high enough to offset the risk of not being repaid for the credit extended to the principal in paying a claim. The underwriters rely heavily on the principal’s personal credit score as a measure of that risk.
A high credit score is considered a good sign that the individual poses little, if any, risk to the surety, resulting in a low premium rate. A low credit score, however, is more concerning, and warrants a higher premium rate to offset the higher risk.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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