Surety bonds play an essential role in the construction industry, acting as a safeguard for project owners and ensuring that contractors meet their obligations. For contractors and project managers, grasping the intricacies of how surety bond cost is calculated is critical to managing and securing projects.
In this blog, we delve into the key factors influencing these values. We’ll equip you with the knowledge to make informed decisions, so you can optimize your approach to selecting and managing surety bonds.
What Are Surety Bonds?
Surety bonds, also known as construction bonds, are considered a three-party agreement between the contractor (principal), the project owner (obligee), and the company providing the bond (surety). This type of contract aims to protect the project owner if the contractor is unable to fulfill their contractual obligations. In such cases, the obligee can file surety bond claims with the surety provider, who will pay the obligee accordingly if they find the claim valid upon investigation.
Types of Surety Bonds and Their Rates
There are three types of commercial surety bonds common to all projects, each calculated differently to get their costs.
Bid Bonds
Bid bonds are used most commonly during the tender stage of a project. They provide the security that should the contractors’ tender proposal be chosen, they can enter into a contract and complete the job successfully.
This bond has the highest cost compared to all other surety bonds. On average, bid bonds cost 10% of the contract bidding price. As such, if your bid on a contract is $120,000, the bid bond cost would be $12,000.
Performance Bonds
Performance bonds guarantee the contractor can successfully perform their obligations as outlined in the contract. The cost of this surety bond generally falls between 1.25% to 2.5% of the contract. Using the same contract price of $120,000, the surety bond cost would be $1,500 to $3,000.
Payments Bonds
Payments bonds, also known as labour and material bonds, guarantee the contractor will make the appropriate payments to anyone who has provided them with materials or services. The surety bond rates for this type are also 1.25% to 2.5% of the contract. Using a surety bond cost calculator for a $120,000 project gives you a $1,500 to $3,000 cost.
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Surety Bond Cost Breakdown
The cost of contract surety bonds goes far beyond the initial premiums. Additional requirements depending on the contractor’s overall financial strength can add to the total. Here are the top five aspects to consider for your cost of a surety bond.
1. Premium Amounts
As previously discussed, the initial costs to obtain the basic surety bonds for a construction project are a combination of percentages of your project cost. Ultimately, you’re looking at 15% of the project price to be solely going to the premiums for your bonds.
2. Administrative Fees
Whether you are bidding on five projects a year or 100 projects, a surety bond company will implement an administrative fee. The general range that the surety company may charge could be between $1,500 to $2,000. If you’re a contractor building a relationship with the surety company, you may find your fee in the range of $2,500 to $3,000.
3. Renewal Fees
If your project takes several years to complete or requires extensions, you may have to pay bond renewal fees. This is an ongoing and added cost to consider when calculating the budget.
4. Collateral Requirements
Surety companies may require new contractors or construction companies with a low credit rating to provide collateral security. This can be assets or cash, which can impact the contractor’s overall cash flow.
5. Changes to the Project
Changes in construction projects are sometimes inevitable. These changes can increase the contract’s overall cost, leading to the surety company charging an additional premium.
Learn More: How to Prevent Construction Cost Overrun
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Managing Your Surety Bond Rates
Aside from the project, surety companies also inspect your company’s standing to determine the total cost of a surety. Consider these additional factors when getting an surety bond:
- Overall project size: Surety providers will review the project you’re bidding on and your work-in-progress report.
- Project type: What’s your experience and expertise with the project? Does it fall within your wheelhouse?
- Financial standing: Is your business financially sound? To determine your standing, the surety company will review your financial statements, including income sheets, balance sheets, and cash flow statements.
- Owner’s personal credit score: Is the owner in good standing with banks? Theirs and the company’s credit score will be reviewed. This is one of the largest factors in the overall surety bond rate that you receive.
Work with KASE Insurance for Your Surety Bond Needs
Navigating surety bonds can be a tall order, which is why you must work with a knowledgeable brokerage who can guide you through this process. Whether you already have a bonding facility set up, or you’re looking to obtain one, KASE Insurance is here to help.
With years of expertise and a proven track record of serving world-class clients in Toronto, we deliver tailored insurance solutions that precisely match your unique needs, with detailed surety bond cost breakdown and no hidden fees. Partner with us to secure your construction projects with a surety bond solution designed specifically for you.
Contact us today and let's work together to protect you and your construction company’s financial interests.