In this article, we’ll walk you through everything you need to know about the Federal Miller Act.
Surety Bond Professionals is a family owned and operated bonding agency with over 30 years of experience. Our expert agents are ready to assist with all your Miller Act bonding needs.
What Is the Purpose of the Federal Miller Act?
In 1935 the federal government passed the Miller Act. This was to provide financial protection for the federal government and the subcontractors/suppliers working on taxpayer-funded construction projects valued at more than $100,000.
Specifically, the Miller Act ensures completion of a federal project in the event of the contractor’s failure to live up to contractual requirements. It also ensures that subcontractors and suppliers are paid in the event of the contractor’s default.
What Does the Federal Miller Act Require?
The Federal Miller Act provides financial protection by requiring construction contractors to purchase a payment bond and a performance bond. This is for the guarantee of contract completion and fulfillment of contractual payment obligations.
In addition to providing a source of funds for compensating parties financially affected by the contractor’s nonperformance or nonpayment, the underwriting scrutiny—necessitated by the bonding requirement—helps ensure that only highly qualified contractors are considered.
How Do Performance and Payment Bonds Work?
The bonds required under the federal Miller Act are legally binding contracts involving three parties:
- The obligee, a federal project owner, files the claim
- Or the unpaid subcontractor/supplier, files a claim in case of a payment bond dispute
- The principal, is the contractor legally obligated to pay claims filed
- The surety is the third-party guarantor, who pay all valid claims
The surety will expedite resolution of a valid claim by paying it right away on behalf of the principal. That initial payment is not a gift to the principal; it’s an extension of credit, which is why every application for a performance or payment bond goes through a thorough underwriting process.
How Much Do Performance Bonds and Payment Bonds Cost?
A contractor purchases a performance bond or payment bond in fulfillment of the Federal Miller Act. There is always a chance they will not readily repay the surety for the debt–created by the surety’s initial payment of a claim. The surety’s underwriters will assess that risk by considering two major factors: the likelihood of the principal incurring claims and the principal’s creditworthiness.
The claim is assessed based on prior claims history, industry experience, and financial stability. The primary indicators of creditworthiness are judged by the company’s financial statement and capital base, along with the principal’s personal credit score. The better the capital base, experience and overall credit, the lower the risk that the surety will have of securing repayment during a valid claim. And the lower the credit risk, the lower the bond premium rate will be. A creditworthy principal who frequently uses bonds may pay a premium rate in the 0.5% to 2.5% range, depending on a variety of factors. A principal who is an infrequent user of bonds or tougher credit case may pay on the higher end of the scale or around 2-3% for performance and payment bonds.
Our surety bond professionals will secure a bonding program, along with any performance and payment bonds required under the federal Miller Act with the most competitive terms.