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 Tennessee Performance Bonds?
Construction project owners can incur large financial losses when a contractor fails to comply with legal and contractual requirements. A performance bond is a contractor’s guarantee to complete a construction job lawfully and ethically and to pay monetary damages to the project owner for losses resulting from the contractor’s noncompliance.
Who Needs Them?
Tennessee’s “Little Miller Act,” the state’s version of the federal Miller Act, differs from the Little Miller Acts of most states because it does not mandate performance bonding for state-funded construction projects. It leaves that decision to the various state contracting agencies. Agencies that choose to require contractors to furnish performance bonds also have the discretion to decide what the amount of the bond for a particular project should be.
Private construction projects are not subject to any bonding regulations in Tennessee, but many private project owners opt to require performance bonds, especially for higher-value jobs.
How Do Tennessee Performance Bonds Work?
The three parties to a Tennessee performance bond are referred to in surety bond lingo as the obligee, the principal, and the surety.
A public contracting agency or private construction project owner (the bond’s “obligee”) can seek compensation for monetary damages caused by the contractor (the bond’s “principal”) by filing a claim against the performance bond. The bond’s guarantor (the “surety”) will determine whether the claim is legitimate. The principal is legally obligated to pay any valid claim, which could be a hefty sum—anywhere up to the full bond amount.
The surety’s guarantee of claims payment is actually an agreement to extend credit to the principal for the purpose of paying a claim. The surety will pay the claim on the principal’s behalf, creating a debt the principal must subsequently repay in accordance with the surety’s credit terms. Failing to repay the debt can result in the surety taking legal action to recover the funds.
How Much Do They Cost?
The premium cost of a Tennessee performance bond depends on the required bond amount and the premium rate. The required bond amount is based on the contract value, and the premium rate is based on the credit risk to the surety—the risk of not being repaid for the credit extended to the principal in paying a claim. The standard measure of this risk is the principal’s personal credit score.
A high credit score is considered proof of a low credit risk, so the premium rate will be low. A low credit score, on the other hand, means higher risk, which warrants 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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