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 performance bond needs.
What Are South Carolina Performance Bonds?
Construction project owners can experience substantial financial losses when a contractor defaults on a contract or otherwise fails to complete a job in full compliance with legal and contractual requirements. By purchasing a performance bond, a contractor guarantees compliance and accepts the legal obligation to pay monetary damages to the project owner for losses resulting from the contractor’s violation(s).
Who Needs Them?
South Carolina’s “Little Miller Act,” the state’s version of the federal Miller Act, is officially known as the South Carolina Payment and Performance Bond Act. As the name suggests, it requires contractors to furnish performance bonds (and payment bonds) in order to be awarded any state public works contract. The bond must be in an amount equal to the contract value.
Although private construction projects are not subject to any bonding regulations, many private project owners do require performance bonds, especially for higher-value jobs.
How Do South Carolina Performance Bonds Work?
Surety bonds have a language of their own. The three parties to a South Carolina performance bond are referred to as the:
- Obligee—the project owner (public or private)
- Principal—the contractor
- Surety—the bond’s guarantor
An obligee seeking compensation for monetary damages caused by the principal can file a claim against the performance bond. The surety will determine whether it is legitimate. The principal is legally obligated to pay any claim the surety deems valid. But that doesn’t necessarily mean the principal has to come up with enough money to pay the claim immediately.
The surety guarantees the bond by agreeing to lend the necessary funds to the principal. In fact, the surety will pay the claimant directly as an extension of credit to the principal. The principal must pay the resulting debt in accordance with the surety’s credit terms. Failing to repay the funds can result in the surety initiating the legal debt recovery process.
How Much Do They Cost?
The premium cost of a South Carolina performance bond is the result of multiplying two figures: the required bond amount and the premium rate. The obligee establishes the required bond amount based on the contract value, and the surety sets the premium rate based on the risk to the surety.
The main underwriting concern is credit risk—the risk of the surety not being repaid for a claim paid on the principal’s behalf. Credit risk is measured by the principal’s personal credit score. The surety then assigns the principal a premium rate appropriate for the risk level.
A high credit score is regarded as reliable evidence of a low credit risk level, so the premium rate will be low. However, a low credit score, on the other hand, means 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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