One of the first questions we hear from potential clients is “Can you get me a Surety Bond?” and the second is “How much will that cost?” Our answers are typically “Depends on several underwriting factors, but it doesn’t cost anything to find out”. Here are the basics of Bonding Costs:
Surety Bond Fees (Premiums) Explained
The fees paid for surety bonds are called premiums. This sounds like insurance premiums, even though surety bonds are not insurance. The typical price range for Performance & Payment Bonds is .5% to 4% of the contract price. Usually, the rate is presented as a dollar amount per $1,000 of the contract price. For example, a $250,000 contract might cost $25.00 per $1,000 of the contract price, or 2.5%. Some Sureties can qualify Principals for “Tiered” rates which allow the cost to decrease the larger the contract becomes. Bid Bonds, after the Surety has approved the job, are usually provided as a courtesy for no fee. This is so the bidder can avoid bidding with cash. Some surety companies may charge a small fee per bid bond or an annual fee. There are many factors that contribute to the cost of performance and payment bonds bond including but not limited to:
- Contract Amount
- Type of contract obligation
- Length of the contract period
- Workmanship warranty period
- State where the contractual obligation resides
- The Surety Company quoting the rate
- The Principal’s credit and/or financial standing of the company and its owners
- The quality of the financial statements and who prepared them
- The Principal’s past job history and work on hand
- Required and/or necessary fees charged by an agent or broker
- The Three C’s of Surety
Who Decides Premiums?
Most surety companies have to file their rates and terms with each state Insurance Commissioner’s Office and must adhere to those filings. Surety rates and premiums are a fee paid to the Surety for the underwriting and prequalifying the Principal. These rates are filed and approved in a way that requires that the premium be calculated based on the contract amount and not the bond amount. Because of this, reducing the bond amount doesn’t usually reduce the amount the surety charges. The cost for a single contract’s performance and payment bond is one fee; there usually is not a separate fee for each bond. For example, if the obligee only requires a performance bond and no payment bond, the cost is the same as if they required both the performance and payment bond.
Note, the above is for traditional construction type performance and payment bonds. Developer and completion bonds, as well as Timber Sale Performance bonds and other classes of surety and would, follow somewhat different guidelines.
In order to receive the most accurate rate, active accounts should periodically refresh their financial statements.
To apply for a bond, visit our home page. For more information and answers to any questions, always feel free to reach out to us, or refer to our prior blogs. To follow our company, visit our socials.
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