If you’ve ever worked on a public works project, you’ve no doubt been required to get a performance construction bond prior to starting the job.
What you may not know is how surety companies calculate the cost of the performance bond you are acquiring. And that’s completely understandable as the way bond rates are determined can seem somewhat mysterious.
However, calculating bond costs is actually a bit more straightforward than you might think. That’s why Commercial Surety Bond Agency is here to help you understand what goes into calculating your construction bond performance costs.
How Performance Bond Costs Are Calculated
The main factors surety companies will use to calculate your bond rates include:
- Contractor’s credit and financial strength – Contractors who are financially sound with good credit scores will generally receive rates that are lower than those with bad credit or less than average financial standing.
- Type of financial statements provided – CPA prepared financial statements will generally get lower rates than internally prepared financial statements. The cost of paying a CPA to produce the financial documents is often offset by the lower rates received.
- Contractor’s past performance on projects – A solid performance record of completing past projects will often result in a lower rate.
- Amount of work a contractor performs – As a general rule, contractors who do more bonded work will receive lower rates.
- Type of work the contractor performs – Sureties will consider the type of work a contractor generally performs when setting rates. For example, asphalt paving contractors have different rates than general building contractors.
As a general rule, larger contracts will also have lower rates. Below is one example of a rate commonly used by sureties, and you can see how the rate declines for bigger contracts:
- First $100,000 of Contract Price @ 2.5%
- Next $400,000 of Contract Price @ 1.5%
- Next $2,000,000 of Contract Price @ 1.0%
What this means is if you have sound financial standing, solid work history, and are working on the types of projects you’re best at, you should generally expect to end up with a bond rate between 0.5% and 1.5% for most projects. If you’re paying more than this, there may be an opportunity to reduce your bonding cost, and if you’re paying 3%, that can definitely be a red flag.
Finally, bond costs for specific projects can also increase based on contractual factors. The most common contractual considerations that could cause your bond rate to go up include:
- Completion Time – Typical surety bond charges are based on either 12 month or 24 month scheduled completion time depending on your surety. If your contract completion schedule is longer than this period, you will incur an additional charge for that particular performance bond.
- Warranty/Maintenance – Many standard contract warranty/maintenance periods are for a period of 12 months, although that can vary. If your contract requires a warranty/maintenance period of more than 12 months, this will result in an additional charge.
- Design-Build Project – Some sureties have specific rates for design-build projects that are different than the premium rates for standard jobs, so you’ll want to make sure to get those prior to a bid.
What If the Contract Does Not Require 100% Bond Coverage?
Surety companies based their rates on the contract amount rather than the bond amount. So, generally the cost will be the same regardless of whether the contract requires a 100% performance and payment bonds for the full value of the contract or only a 50% bond for half the contract value.
Is there a Separate Charge for Performance and Payment Bonds?
Sureties do not charge separately for performance and payment bonds. Therefore, if you have a $1 million contract, and your premium rate is 1%, you will pay $10,000 which will cover both the performance and payment bonds. You don’t need to pay $10,000 for each one.
Some surety companies will charge a lower rate if you require a payment bond only, as there is less risk in these for the surety.
While there are several factors that go into determining construction performance bond costs you should hopefully now have a better understanding of how your bond rate was determined.
In the end, if you are seeking a performance bond, are in good financial standing and meeting many of the other specifications noted above and are paying 3% bond rates, you’re probably paying too much.
At Commercial Surety Bond Agency, we’re happy to talk to you about the factors that influenced your performance bond costs, and to answer any other questions that you may have. Feel free to call us at (714) 627-4587, or contact us today to find out how we can help.