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 Utah Performance Bonds?
It can be very costly for a construction project owner if a contractor fails to comply with legal and contractual requirements or defaults on a contract entirely. A performance bond provides important financial protection in such situations. In purchasing one, the contractor (the bond’s “principal”) guarantees to complete a construction job lawfully and ethically. The bond also provides a way for the project owner (the bond’s “obligee”) to recoup monetary damages resulting from the contractor’s noncompliance.
Who Needs Them?
Utah’s “Little Miller Act” differs from the federal Miller Act in that it mandates performance (and payment) bonds for all state-funded construction projects, regardless of contract value. The required performance bond amount is 100% of the contract value.
The Little Miller Act does not apply to private construction projects. Still, many private project owners require contractors to furnish performance bonds, especially for higher-value jobs.
How Do Utah Performance Bonds Work?
The third party to a Utah performance bond, in addition to the obligee and principal, is the bond’s guarantor (known as the “surety”). The surety guarantees the payment of valid claims but is indemnified by the surety bond and has no legal responsibility for the obligee’s loss.
When the obligee submits a claim seeking compensation for the financial harm caused by the principal, the surety will determine whether it’s legitimate. If it is, the principal is legally obligated to pay it. However, the surety has agreed to extend credit to the principal for that purpose.
The surety will pay the claim on the principal’s behalf, which creates a debt the principal must then repay in accordance with the surety’s credit terms. Not doing so can lead to the surety taking legal action to recover the funds.
How Much Do They Cost?
The premium cost of a Utah performance bond is a small percentage of the required bond amount, which is based on the contract value. That small percentage, the premium rate, is assigned by the surety on a case-by-case basis. It will reflect the risk of the surety not being repaid for a claim paid on the principal’s behalf. The accepted measure of such credit risk is the principal’s personal credit score.
A high credit score means the credit risk is low, so the premium rate will be low. A low credit score, however, means greater risk to the surety, 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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