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What Are Ohio Performance Bonds?
Ohio performance bonds provide important financial protection for project owners against losses caused by a contractor’s failure to complete a construction job according to contract specifications. The cost to remedy the situation can be significant, especially if that remedy involves redoing work or bringing in another contractor to complete the project.
Performance bonds help prevent contractor performance problems by requiring compliance with all applicable regulations and the terms of the construction contract. They also provide a mechanism and source of funds for compensating project owners for losses caused by a contractor’s noncompliance.
Who Needs Them?
The text of Ohio’s “Little Miller Act,” the state’s version of the federal Miller Act, is found in the Ohio Revised Code, Chapter 153.
It requires performance bonds (and payment bonds) from contractors selected for public works projects valued in excess of $100,000. All such performance bonds must be in an amount equal to 100% 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 Ohio Performance Bonds Work?
When a contractor (referred to as the bond’s “principal”) defaults or fails to perform as required, the contracting authority or project owner (the “obligee”) can file a claim against the bond for any resulting financial loss.
In addition to the principal and the obligee, there is a third party to an Ohio performance bond—the bond’s guarantor (called the “surety”). The surety determines whether a claim is valid and must be paid. The legal obligation to pay a valid claim belongs exclusively to the principal. However, as the guarantor, the surety will pay a valid claim on the principal’s behalf as an extension of credit. If the principal fails to repay the debt according to the surety’s credit terms, the surety can take legal action to recover the funds.
How Much Do They Cost?
The annual premium you’ll pay for an Ohio performance bond is the result of multiplying the bond amount (also known as the bond’s “penal sum”) by the premium rate. The obligee establishes the required bond amount based on the value of the construction contract. The surety assigns a premium rate commensurate with the perceived risk of not being repaid for credit extended to the principal. The principal’s personal credit score is the standard measure of that risk.
Someone with a high credit score presents little risk to the surety, so the premium rate will be low. Conversely, a bond applicant with a low credit score is regarded as a greater risk, so a higher premium rate is warranted.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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