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 Dakota Performance Bonds?
North Dakota performance bonds protect construction project owners against losses resulting from a contractor’s default or failure to complete a job according to contract specifications. The cost of the delays a contractor’s nonperformance causes can be substantial, especially if it becomes necessary to bring in another contractor to finish the job.
Performance bonds serve both preventive and remedial purposes. They help prevent performance problems by requiring contractors to comply with all applicable regulations and the terms of the construction contract. And when a contractor (known as the bond’s “principal”) fails to perform as required, the contracting authority or project owner (the performance bond’s “obligee”) can file a claim against the bond for the resulting financial loss.
Who Needs Them?
The official name of North Dakota’s “Little Miller Act,” the state’s version of the federal Miller Act, is the North Dakota Public Construction Contract Performance and Payment Bond Act. It requires performance bonds (and payment bonds) from contractors selected for public works projects valued in excess of $200,000. All such performance bonds must be in an amount equal to 200% of the contract value.
There is no statutory requirement for performance bonding for privately funded construction projects. But private project owners may opt to require performance bonds, especially for larger projects.
How Do North Dakota Performance Bonds Work?
North Dakota performance bonds are legally binding on all three parties involved—the obligee, the principal, and the bond’s guarantor, known as the “surety.”
It’s up to the surety to determine whether a claim against a performance bond is valid. If it is, the principal is legally obligated to pay it. But having guaranteed the payment of valid claims, the surety will pay it as an extension of credit to the principal. The principal must repay the debt according to the surety’s credit terms. Failing to repay the surety can lead to the surety initiating legal debt recovery proceedings.
How Much Do They Cost?
The annual premium for a North Dakota performance bond is the product of multiplying the bond amount by the premium rate. The obligee establishes the required bond amount based on the value of the construction contract, and the surety sets the premium rate based on the risk to the surety. The main concern is the credit risk stemming from the possibility that the surety might not be repaid for the credit extended in paying a claim on behalf of the principal. That risk is measured by the principal’s personal credit score.
A high credit score is reliable evidence of low credit risk, which calls for a low premium rate. On the other hand, a low credit score indicates greater risk, so a higher premium rate is needed to offset the elevated risk.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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