Understanding Performance Bond Costs
for California Construction Companies
Your Guide to Performance Bond Costs
Running a construction business in California involves navigating strict bond requirements to bid on and secure projects. For many construction companies, bonding capacity is the number one item holding them back from growing.
At Commercial Surety Bond Agency (CSBA), The Construction Bond Specialists, we focus on providing expert guidance to help you increase bonding capacity and strategically build your business. This article breaks down performance bond costs, how premium rates are calculated, and what factors influence what your construction company will ultimately pay.
How Much Does a Performance Bond Cost in California?
The cost of performance bonds is relatively low relative to the financial assurance they provide. Standard performance bond premiums typically range from 0.5% to 3% of the total contract amount.
- Highly Qualified Construction Companies: If you have excellent credit and strong financial statements, premium rates are generally between 0.5% and 2% of the contract amount.
- New in Business or Higher-Risk Companies: For companies with lower credit scores or those lacking formal financial statements, premiums can range between 2% and 3%.
Who Pays for the Performance Bond?
The construction company (the principal) is responsible for procuring the bond and paying the premium to the surety company. However, this cost should be factored directly into your project bid. By including the bond premium in your estimate, you transfer the cost of the performance bond to the project owner.
How to Calculate Performance Bond Premiums
The basic formula for calculating your performance bond cost is straightforward:
- Premium = Rate x Contract Amount
Bond rates can be flat or they can be on a sliding scale that tiers down as the contract gets larger so it’s important to understand that when you’re calculating the bond cost.
For example, a common slide rate is 2.5% for the first $100,000 of contract amount, then it drops to 1.5% for the next $400,000, and then down to 1% for the next $2,000,000. Here’s an example of calculating the bond premium using a flat 1% and also using a sliding scale so you can see the difference:
Flat Percentage Rate Example
On a $1,000,000 contract, with a 1% flat premium:
- $1,000,000 X 1% = $10,000 premium
Sliding Scale Rate Example
For that exact same $1,000,000 contract using the 2.5% / 1.5% / 1% slide mentioned above:
- $100,000 X 2.5% = $2,500
$400,000 X 1.5% = $6,000
$500,000 X 1% = $5,000
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Total: $1,000,000, total premium $13,500 = 1.35%
Bond Premium Calculator
Use our free calculator to estimate your performance and payment bond premiums.
Factors That Influence Your Bond Cost
There are several factors that can influence the premium rate your construction company qualifies for. Sureties evaluate these areas when determining your bond program and premium rate:
- Financial Statement Quality: The quality and strength of your financial reporting impacts a contractor’s premium rate. For example, providing CPA reviewed financials instead of internally prepared financials can be the difference in qualifying for the better bond rate.
- Industry Experience and Track Record: Underwriters look at the size and successful completion of your past projects to gauge your capabilities.
- Type of Work Performed: The scope of work impacts the risk profile. For example, design/build work is viewed as higher risk than a straight painting contract.
- Duration of the Work: Sureties often charge additional premium when the project is over 24.
- Extended Warranties: When a project has a labor or installation warranty that the contractor is responsible for beyond 1 year, sureties typically have an additional premium.
Frequently Asked Questions
No, the premium is a non-refundable fee paid to the surety company to underwrite and issue the bond. However, if a deductive change order is issued and the contract amount decreases, the return premium will be calculated based on the amount deducted.
The surety will ask for the final contract amount to be confirmed at the completion of the project and additional premium will be charged if the contract amount increased. For this reason, it’s important to include the bond premium when quoting change order work. Read our article on the risks contractors should look for in performance bond forms.
It depends on your company's financial health and the size of the projects you are pursuing. Securing a bond requires financial underwriting to ensure you have the capacity to finish the job. If you are a smaller construction company, there are also programs like the SBA Surety Bond Program that can help increase your limits by backing bonds up to $9 million for standard projects and $14 million for federal contracts, and express bond programs that are simply based on personal credit and experience where contractors can get bonds up to $3 million.
Get a Performance Bond Quote
We want to know more about how we can help your construction business get the right bond for your next project. Fill out our form and one of our local expert bonding agents will be in touch with you shortly. Contact us to explore the CSBA difference and receive the expert guidance you need.