A surety bond is an agreement between three parties concerning insurance for other people. The bond is only used when you fail to follow rules or regulations and includes:
- A principle: the party that needs the bond
- An obligee: the party that is protected by the bond
- A surety: the party that issues the bond
General contractors typically obtain a surety bond for reasons like:
- In the event the contractor experiences cash flow problems, the Surety can assist the contractor.
- In the event the contractor abandons the job, the Surety can replace the contractor.
- In order to become licensed as a general contractor, many states or local governments will require an initial bond, sometimes in addition to liability insurance.
Once you apply to get bonded, you can expect to pay a premium that is 1-15% of the total bond amount. The rate is often based on your personal credit score, so there is no standard amount. Surety bonds are issued at state, county, and local levels, so there is no national average cost to go by. However, there are factors you can take into account when determining how much your surety bond will cost.
Average Cost by Credit Score
Below is a table of typical surety bond amounts and their subsequent premiums with a variety of credit scores:
|Surety Bond Amount||700||650-699||600-649||550-599||549 and lower|
How Often Do You Pay for Surety Bonds?
The surety bond payment is different than other insurance payments you may have encountered. When you are quoted a surety bond cost, the quote is a one-time payment quote. However, bonds are quoted in year terms. A term is how long the surety bond is in effect. For instance, if you are quoted $100 for a one-year surety bond, you will only need to pay $100 once, not monthly. If your bond is renewable, then you must pay the premium at the end of each term to renew it.
Types of Surety Bonds
Almost any contract can be bonded and financially protected. The most common surety bond a general contractor will see is a contract surety bond, which is used for the construction of buildings or roads. However, there are different types of construction bonds including:
- Contractor license
- Bid bond
- Construction performance bond
- Payment bond
- Maintenance bond
- Utility bond
- Supply bond
- Subdivision bond
Depending on the type of project, a contractor could have a variety of bonds in play during the course and progress of a project. Often there are specific guarantees that need to be made in each phase.
How Is the Rate Calculated?
While your credit score is a significant determining factor of your surety bond rate, there are other factors that can affect the cost, including the type of bond, the amount of the bond, and the risk level of the applicant.
The underwriting process evaluates your financial health and status, and helps determine whether a bonding company should take on an applicant’s contract based on their risk. Underwriters usually work for a fee, which is determined by examining each person who has a 10% or larger stake in the entity being bonded. Factors underwriters look at include:
- Work history
- Credit score
- Personal and business financials
Underwriters also consider the bond amount and the risk associated with it. By reviewing all these factors, the underwriter can provide a quote for their services.
Ownership and Experience
Your experience in your industry can also affect the premium of your surety bond. For instance, if you have been in business for 20 years, then your surety bond premium could be lower than if you were in business for five years. A surety company often sees new businesses as risks because they might not have a stable cash flow, their credit may be too new, or they have past credit problems.
Additionally, if you have a history of completing your work on time and in a satisfactory manner, your premium could also be lower. However, there is no guarantee that your premium will be lower or higher based on your experience; it is only a factor that the surety company will take into account when issuing a bond.
A surety bond is based on the financial guarantee that the principle can pay the bond’s terms. The lower the risk of a financial loss to the surety company, the lower the surety bond premium. Bonds with higher risks are evaluated by underwriters more closely as well as the state in which the bond is issued. However, if you have the finances to back the bond claim, you should have no problem securing a surety bond.
Surety bonds can help contractors ensure they get paid and clients get their projects finished. To receive a fair premium, be sure to maintain a good credit score and research the type of bond you’ll need.