If you’re operating in the diverse landscape of business and construction in Ontario, you’re likely no stranger to the significance of surety bonds. They serve as the cornerstone of trust and security, fostering a climate where business transactions, construction projects, and government contracts can flourish with confidence.
The factors that determine surety bond costs, however, are not always clearly understood by business owners, project managers, and contractors. This small difference in education can set a successful business apart from a business that struggles to win construction contracts.
After all, it’s not just a matter of signing on the dotted line; it’s about grasping the intricacies of how these bonds function and how their financial implications can affect your bottom line.
In this blog, we’ll break down these factors in more detail so you can have a better idea of what to expect when seeking out a surety bond.
5 Factors that Impact the Price of a Surety Bond
The cost of surety bonds may be multi-faceted, but with the right insight, you can transform these expenses into strategic investments that propel your business forward.
1. Bond Type
The kind of surety bond you’re purchasing matters, as it determines the level of risk your surety provider is assuming. The higher the risk, the higher the surety bond cost.
2. Bond Amount
Some surety bonds have a predetermined premium and amount, such as license and permit bonds or freight broker surety bonds. This is usually the case for professionals who must obtain surety bonds to receive their licenses to do business. However, the bond amount will depend on the details of the project and the stakeholders involved.
3. Personal Credit Score
If you have a bad credit score, surety companies will consider you a financial risk and ask you to pay a higher surety bond premium. However, if your credit score is strong, the premium you pay could be as low as 1% of the total bond amount.
4. Location and Regulatory Bodies
Surety bond premiums are also impacted by the province or territory you’re operating in and their respective regulatory authorities requiring the bond. This is especially true in cases where a predetermined bond is needed.
5. Industry and Experience
Generally, you can expect a surety bond company to associate higher premiums with larger projects. Some industries also carry more risk than others, so if you work in a high-risk industry, expect to pay more as well.
Experienced professionals with proven track records can expect to pay less when they get a surety bond. Not only does their reputation communicate reliability, but it also suggests they are more likely to avoid claims by preventing mistakes.
The Average Cost of a Surety Bond
In general, the average cost of surety bond premiums range from 1% to 15% of the total bond amount, making them a cost-effective risk management tool.
Surety bonds are often required by law, especially if you’re working on a large government-funded project. Getting a bond proves you are financially capable of taking on the project and shows your commitment to see the project to completion.
So, are bond amount and bond cost the same?
No, your bond cost is not the same as the bond amount. They are two distinct aspects of a surety bond.
Bond amount: The bond amount, also known as the bond penalty or coverage amount, represents the maximum amount of financial coverage that the surety bond provides.
Bond cost: The bond cost, often referred to as the premium, is the fee that the principal (the party required to obtain the bond) pays to the surety company to secure the surety bond.
Here is an example scenario to break this down further.
Scenario: Construction Performance Bond
Bond amount: $500,000
Bond cost: 2% of the bond amount
In this scenario, a construction company, Building Block Construction, has been awarded a contract to construct a new office building. The project owner, ABC Developers, requires Building Block Construction to obtain a performance bond with a bond amount of $500,000 as a condition of the contract. The bond serves as a guarantee that the construction company will complete the project in accordance with the contract’s terms and specifications.
- The bond amount, in this case, is $500,000. This means that if Building Block Construction fails to complete the project as agreed in the contract, and ABC Developers incurs financial losses due to the contractor’s default, they can make a claim against the bond for up to $500,000 to cover their losses
- The bond cost is the fee that Building Block Construction must pay to a surety company to secure the performance bond. In this scenario, the premium is calculated at 2% of the bond amount. Therefore, the bond cost or premium is $10,000 (2% of $500,000).
Building Block Construction will pay the $10,000 premium to the surety company to obtain the $500,000 performance bond. This premium is typically an annual expense, so if the project lasts for multiple years, Building Block Construction would need to renew and pay the premium annually to keep the bond in force.
Protect Your Finances With KASE Insurance
Understanding surety bond costs and how they work can be daunting, but consulting with an experienced surety and bonding provider can simplify the process.
KASE Insurance is your dedicated surety bond provider in Ontario. We are a passionate team of insurance brokers who are ready to help professionals in the construction industry navigate the complexities of construction bonds. No matter what questions you have, we’re happy to answer them!
Contact us today to learn more about our services.