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What Are Oklahoma Performance Bonds?
Construction project owners throughout the state rely on Oklahoma performance bonds for protection against financial losses caused by a contractor’s failure to perform according to contract specifications. Redoing unacceptable work or bringing in another contractor to complete the project can be costly.
Performance bonds require compliance with all applicable construction regulations and contract specifications. They also provide a way for project owners to seek and obtain compensation for monetary damages caused by a contractor’s noncompliance.
Who Needs Them?
The official name of Oklahoma’s “Little Miller Act,” the state’s version of the federal Miller Act, is the Oklahoma Competitive Bidding Act.
It requires contractors to furnish performance bonds (and payment bonds) as a prerequisite for entering into contracts for public works projects valued in excess of $50,000. All such performance bonds must be in an amount equal to 100% of the contract value.
Oklahoma’s Little Miller Act does not apply to privately-funded construction projects. But it’s not uncommon for private project owners to require performance bonds, especially for larger construction projects.
How Do Oklahoma Performance Bonds Work?
When a contractor (the bond’s “principal”) fails to perform as required, the public contracting authority or private project owner (the “obligee”) can file a claim for any resulting monetary damages.
The third party to an Oklahoma performance bond is the bond’s guarantor (called the “surety”). The surety investigates a claim upon receipt to determine its validity. The principal bears the full legal obligation to pay a valid claim, but the surety guarantees that it will be paid. That guarantee is in the form of an agreement to extend credit to the principal for the purpose of paying a claim.
In practice, the surety will pay a claim initially, and the principal must repay the resulting debt in accordance with the surety’s credit terms. Failing to do so will result in the surety initiating the legal debt recovery process.
How Much Do They Cost?
Oklahoma performance bonds are sold for an annual premium that is a small percentage of the bond amount that was established by the obligee. That percentage, the premium rate, is assigned to each bond applicant based on the credit risk to the surety, as measured by the applicant’s personal credit score.
A high credit score means the credit risk is low, so the premium rate will be low. However, a low credit score is a sign of higher risk, which calls for a higher premium rate.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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