Minnesota Construction Bonds

Some types of contractors are required to obtain a state license, which may or may not involve purchasing a contractor license bond. Some Minnesota cities and counties have their own licensing or permitting rules, which may entail bonding.

Minnesota’s “Little Miller Act” requires contractors to purchase performance bonds and payment bonds if awarded state-funded construction projects with an estimated value above a certain threshold level. The Little Miller Act does not apply to privately funded construction projects, but it’s not uncommon for private project owners to require performance and payment bonds, particularly for higher value projects. Both public and private project owners (referred to as the “obligee” in their respective construction bond agreements) may choose to require bid bonds for contracts to be awarded through competitive bidding.

Other construction bonds that may be required by both public and private project owners include:

• Maintenance bonds
• Subdivision/site improvement bonds
• Supply bonds
• Solar decommissioning bonds
• Right of Way bonds

Every Minnesota construction bond involves three parties, the aforementioned obligee and principal, and a third party known as the surety. This is the party acting as the bond’s guarantor.

The principal bears the full legal obligation to pay claims the surety finds to be valid. To guarantee that those claims are paid, the surety agrees at the time the bond is purchased to extend credit to the principal for the purpose of paying them.

In practice, the surety will pay a valid claim on the principal’s behalf, essentially lending the funds to the principal. If the principal does not then repay that debt to the surety as agreed, the surety will take leal action to recover the funds.