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 payment bond needs.
What Are Pennsylvania Payment Bonds?
Pennsylvania payment bonds are intended to protect construction project owners against the financial consequences of a contractor’s failure to pay subcontractors or suppliers. A payment bond protects the project owner (known as the bond’s “obligee”) by providing a way for unpaid subcontractors and suppliers to obtain compensation without encumbering the property with mechanic’s liens. The bond legally obligates the contractor (the bond’s “principal”) to pay the valid claims of subcontractors and suppliers.
Who Needs Them?
Pennsylvania’s Little Miller Act, the state’s version of the federal Miller Act, is laid out in the Pennsylvania Consolidated Statutes, Title 62, specifically sections 393.1 to 393.10. All state-funded public works projects exceeding $100,000 are subject to their state’s Little Miller Act, which requires contractors to furnish payment bonds for the full contract value (100%).
A payment bond, when one is required, must be in place before work on the project can begin. The obligee will inform you of any payment bond requirements you will need to meet.
The Little Miller Act applies to state-funded projects only. However, many private project owners also require payment bonds as protection against mechanic’s liens.
How Do Pennsylvania Payment Bonds Work?
There is a third party to a Pennsylvania payment bond in addition to the obligee and principal—the bond’s guarantor (referred to as the “surety”). The bond is legally binding on all three.
While the principal is legally obligated to pay valid claims against the bond, the surety guarantees their payment by agreeing to provide the necessary funds as a loan to the principal. The surety actually will pay the claim directly as an extension of credit to the principal. If the principal fails to repay that debt in accordance with the surety’s credit terms, the surety will pursue the matter in court to recover the funds.
How Much Do They Cost?
The cost of a Pennsylvania payment bond is calculated by multiplying the bond amount by the premium rate. The bond amount is established by statute or by a private project owner and is tied to the contract price. The surety assigns a premium rate that is sufficient to offset the risk of the principal not repaying the surety for the credit extended in paying a claim. The universally accepted measure of that risk is the principal’s personal credit score.
A bond applicant with a high credit score is viewed as a low risk to the surety, so a low premium rate is appropriate. Someone with a low credit score, on the other hand, is concerning and calls for a higher premium rate to offset the greater risk.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
Call Us Today
Our surety bond professionals will help you grow your revenue by maximizing your surety capacity. Call us today!