How to Know if You’re Paying Too Much for Your Surety Bonds

Surety bond rates are determined on a case by case basis, which makes it much more difficult to know if you’re paying too much for your surety bonds. It’s tempting to point a finger at the surety company and say they’re simply charging too much, but there are several things a contractor can do to pay less for their surety bond

To know whether you’re paying too much and how to lower the surety bond‘s cost, we first have to understand how the premium is determined and what can drive the cost up.

How is the Cost of a Surety Bond Determined?

There are several factors that help determine what you will pay the surety for the bond and they’re important to know as a contractor’s standing in each of these areas will help you understand if you’re paying too much for your bonds:

  • Personal credit score
  • The financial statements provided, if any have been
  • If the financial statements were prepared by a CPA
  • The size of the surety bonds needed
  • The strength of a contractor’s financials

These factors aside, the average cost of a surety bond ranges from 0.5% to 3% of the bond amount, but a contractor’s financial standing is a major factor in that percentage.

What Can Drive the Surety Bond Cost Up?

Since there are factors that determine the cost of a surety bond, then you can learn what about each drives the premium up and avoid those pitfalls. Let’s go over each one and discuss how the price of a surety bond can increase depending on them:

  • If your financial statements aren’t prepared by a CPA with a construction accounting background or not prepared by one at all, the premium rate is typically higher. This is because a surety company will see CPA-prepared financials as having been verified by a third party and ensure accuracy in the reporting. We cover this topic more in-depth here: Are Financial Statements from a CPA Always Required for Bonding?
  • Having a low credit score or weak financials can lead to a higher premium rate, but it also can mean the surety company may place certain conditions on the bonds that will add other fees to the bond. If a contractor’s credit score or internal financials are bad enough, the surety company may decline to issue the bond altogether. This is because surety bonds are underwritten to avoid losses.
  • If you don’t provide financial statements and use a surety program based solely on a personal credit score, you will usually pay more for your surety bonds due to the limited information you provide. Typically the premium rate will be in the 2.5% to 3% range.

  • While this wasn’t listed previously as a factor, it’s important to note that the warranty on a construction project can increase how much you pay. Most sureties charge an additional premium if the warranty that the contractor has to provide is greater than one year.
  • The length of a job is also a contributing factor. Many surety companies will charge an extra fee for projects over 24-months. 

Bond Premium Calculator

Use this free tool to calculate an estimated cost for your performance and payment bonds.

How to Pay Much Less for a Surety Bond

Now that you understand how a surety bond‘s cost is determined and how each can drive up the premium you pay, what can you do to lower them? As each factor centers on examining a contractor’s financial state, improving that is the key to pay the surety less:

  • You’ll want to take steps to increase your credit score. Even if the financial end of your business is in good standing, your personal credit score is still a factor.

  • The quality of your financial statements can help you lower what you pay for your surety bonds. If you’re concerned about this area, we strongly encourage you to read about how investing in quality internal financials can help you with getting bonded: How Investing in Quality Internal Financials can Increase Bonding Capacity – CSBA
  • Have a CPA prepare your financial statements. As discussed earlier, 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.

We Know Surety Bonds at CSBA

We at CSBA are exclusively dedicated to surety bonds for California contractors and thanks to that professional dedication, we have the experience and knowledge to help you avoid paying too much for your surety bonds. Our surety specialists will guide you through the bonding process and prepare for the bond size you need while helping you grow your bonding capacity. 

Due to CSBA being solely focused on surety bonds, we also have access to more surety companies and are able to align contractors with surety providers that can give them better rates. Along with this, a contractor working with us has access to the resources they need to secure a better premium and greater bonding capacity, such as internal underwriters, controllers, bookkeepers, and CPAs with a background in construction accounting. 

If you think you’re paying too much for surety bonds, we at CSBA will be the first to tell you and help you fix it.

Dan Huckabay
About The Author

Dan Huckabay


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