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What Are Ohio Payment Bonds?
Similar to payment bonds in other states, Ohio payment bonds protect project owners from mechanic’s liens if a contractor fails to pay subcontractors or suppliers. They achieve this by providing an alternative way for unpaid subcontractors and suppliers to get compensated. The bond legally requires the contractor (the principal) to pay valid claims, with payment guaranteed by a third party (the surety).
Who Needs Them?
Ohio’s Little Miller Act, found in the Ohio Century Code (Chapter 48-01.2), requires contractors working on public construction projects exceeding $250,000 to have payment bonds for the full project cost (100%). This mirrors the federal Miller Act but applies specifically to state-funded projects in Ohio.
While private construction projects are not subject to Ohio’s Little Miller Act, many private project owners also request payment bonds to avoid mechanic’s liens, similar to other states.
How Do Ohio Payment Bonds Work?
An Ohio payment bond involves three parties: the project owner (obligee), the contractor (principal), and the guarantor (surety). The bond legally obligates the contractor to pay valid claims. The surety, as the guarantor, agrees to extend credit to the contractor to pay those claims.
However, the surety doesn’t directly give money to the contractor. Instead, the surety pays the claim on the contractor’s behalf. The contractor is then responsible for repaying the surety according to their credit terms. Failure to repay may lead to legal action by the surety to recover the funds.
How Much Do They Cost?
The cost of an Ohio payment bond is calculated by multiplying the bond amount by the premium rate. The project owner determines the bond amount based on the contract price. The surety sets the premium rate on a case-by-case basis.
The main factor influencing the premium rate is the credit risk, or the risk of the contractor not repaying the surety. This risk is assessed based on the contractor’s personal credit score.
A high credit score indicates a lower risk, resulting in a lower premium rate. Conversely, a low credit score suggests a higher risk, which leads to a higher premium rate to compensate the surety.
Typically, a well-qualified contractor can expect a premium rate between 0.5% and 3%.
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