How Much Do Surety Bonds Cost?
Surety bond rates can be a mystery to contractors causing uncertainty of what contractors can expect and how to factor it into a budget ahead of time. Understanding how sureties calculate surety bond prices can help you prepare for the bonding process and position yourself for the lowest possible bond rates.
Surety Bond Premiums
To help contractors with a new business learn the ins and outs of surety bonds and give them a leg up in securing the opportunities that can be provided for new businesses, we’ve put together this section that will help a new contractor navigate surety bond costs.
Surety bond premiums are charged as a percentage of the contract. There are various factors that determine the percentage, which will be outlined further below, but the average cost of a surety bond ranges from 0.5% to 3% of the bond amount. It’s important to note that the surety charges the premium at the time the bond is issued based on the initial contract price, but if the contract price goes up or down, there will be an adjustment to the premium at the end, meaning the contractor could owe an additional amount or be due a return premium. Thus, it is important for contractors to always include the cost of the bond in change orders.
Surety Bond Cost by Bond Type
Performance Bonds & Payment Bonds
Sureties do not charge separately for performance and payment bonds, though some surety companies will charge a lower rate if only the payment bond is needed due to the lower risk for the surety company. For both performance and payment bonds, a surety provider will use the following factors to calculate your surety bond costs:
- Contractor’s credit and financial strength: Contractors with good credit scores and good financial standing will generally receive rates that are lower.
- The type of financial statements provided: CPA-prepared financial statements will generally get lower rates than internally prepared financial statements.
- A contractor’s past performance on projects: A solid performance record of completing past projects will often result in a lower rate.
- The amount of work a contractor performs: Contractors who do more bonded work will generally receive lower rates.
- The type of work the contractor performs: Sureties will consider the type of work a contractor generally performs when setting rates.
Surety companies do not charge a premium for the bid bond itself, but a premium is charged if you are awarded the contract. Remember, that a bid bond protects the project owner if the contractor fails to enter into the contract or secure the other surety bonds needed. Therefore, you need to be aware of what the cost is for the performance and payments bonds, and factor that cost into your bid even though you won’t be paying for the bid bond.
How Do I Know I'm Getting a Good Deal on Surety Bond Rates?
A contractor can take steps to reduce the cost of the surety bonds they need by:
- Taking steps to increase your personal credit score.
- The quality of financial statements cannot be understated. Investing in your internal financials can help secure the surety bonds needed and lower the rate, we highly recommend reading this article to learn how to invest in internal financials: How Investing in Quality Internal Financials can Increase Bonding Capacity – CSBA
- Have a CPA prepare your financial statements, this assures the surety company that your statements are accurate and prepared correctly.
- Strengthen your retained earnings and capital. A surety company will charge less and provide bigger bonds if they’re confident you have assets to pull from if needed.
- Work with a surety expert. Having a surety agent guide you through the bonding process and help you prepare for it can help you pay the surety less for your bond, especially with the relationships they have with surety providers.
We at CSBA work with newer contractors and take pride in helping them grow their businesses while educating them on the opportunities that increasing bonding capacity offers. To better help California contractors achieve their business goals, we’ve assembled this guide and provided information directed at contractors who’ve just begun their business. We encourage you to read through and discover the tools that can help you grow into the company you’re working to become.
A Guide to Surety Bonds for Newer in Business Contractors
Below you’ll find answers to commonly asked questions newer contractors have about establishing a bond program or growing their bond limits to achieve their goals.