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What Are Oregon Payment Bonds?
Construction contracts stipulate how much and when subcontractors and suppliers are to be paid by the prime contractor. When contractors do not live up to their payment obligations, the project owner’s property can end up being encumbered with mechanic’s liens. Payment bonds are intended to prevent this and ensure that those who provide labor and materials are compensated.
A payment bond provides financial protection for the project owner (the bond’s “obligee”) and legally obligates the contractor (the bond’s “principal”) to pay valid claims filed by unpaid subcontractors or suppliers.
Who Needs Them?
Oregon’s “Little Miller Act,” the state’s version of the federal Miller Act, is the Oregon Public Works Minimum Age Act. The relevant text is found in Title 28, Chapter 279C of Oregon’s Revised Statutes.
The Little Miller Act requires contractors to furnish a payment bond prior to entering into a contract for a state-funded construction project with a value in excess of $100,000. Every payment bond must be in an amount equal to the full project value.
Private construction projects are not subject to the Little Miller Act. Nonetheless, many private project owners choose to require payment bonds from their contractors to eliminate the risk of mechanic’s liens.
How Do Oregon Payment Bonds Work?
The third party to an Oregon payment bond, along with the obligee and the principal, is the bond’s guarantor (the “surety”). The surety’s guarantee that valid claims will be paid actually is an agreement to lend the principal the money to pay them, if necessary. But that doesn’t mean the surety will write the principal a check.
Rather, the surety will pay the claimant directly as an extension of credit to the principal. The principal is legally obligated to pay back the resulting debt in accordance with the surety’s credit terms. If the principal does not make full repayment, the surety will take legal debt recovery action.
How Much Do They Cost?
Multiplying the bond amount by the premium rate yields the annual premium for a payment bond. While the obligee establishes the required bond amount, the surety sets the premium rate for each bond applicant.
The primary factor in determining the premium rate is the risk of the surety not being repaid for the credit extended to the principal in paying a claim. This credit risk is normally measured based on the principal’s personal credit score.
The risk of extending credit to a person with a high credit score is perceived as low, which makes a low premium rate appropriate. But a low credit score warrants a higher premium to offset the greater credit risk.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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