Guides
What a surety bond costs and how it is priced
Surety premium is a rate on the bond amount, set by your credit and financial strength. How contract and license bonds are priced and how to lower the rate.
A surety bond premium is a percentage of the bond amount, called the penal sum, and the percentage depends far more on you than on the job. Because the surety expects to recover every dollar it pays out, it prices the bond on your credit, financial strength and track record, not on a pool of expected losses the way an insurer prices a liability policy. Two businesses buying the same bond can pay rates that differ by a factor of two or more.
How the premium is built
The premium is a rate multiplied by an amount. What changes is the rate and the amount it applies to.
| Bond type | What the rate applies to | What moves the rate |
|---|---|---|
| Contract bonds (performance and payment) | The contract price, in tiers that step down as the contract grows | Financial strength, work class, size and duration of the job, track record |
| Bid bond | Usually no separate charge | The surety wants the final bond business |
| License and permit bonds | The fixed bond amount the agency sets | Credit of the owners, years in business, bond type |
| Court, fiduciary and other bonds | The penal sum | Credit and, for some, collateral |
Contract bond rates are expressed per $1,000 of contract price. Because the rate steps down as the contract grows, the effective rate on a larger job is lower than the rate on its first dollars. Sureties typically quote one premium for the performance and payment bond pair, based on the contract price, so ask whether your quote covers both.
Rates are filed, not invented
Surety is regulated as a line of insurance. In New York, for example, an Insurance Department opinion dated April 26, 2004 explains that surety rates and rating plans must be filed with the Department, are subject to "file and use," and that surety insurers generally follow the Surety Association of America's manual (the association is now the Surety & Fidelity Association of America) unless they have filed an exception (NY Insurance Department opinion). The same opinion says contract bond premiums are payable in advance and the original premium is fully earned under the manual, so if the owner cancels the project, a refund depends on the carrier's filing. Filing rules vary by state, and the surety's credit tier, not the manual rate alone, decides what you pay.
What the surety looks at
For a contract bond, underwriters weigh character, capacity and capital:
- CPA-prepared financial statements, and how current they are.
- Working capital and net worth, which set the program size (bonding capacity).
- The work-in-progress schedule: overbillings, underbillings, backlog and the fade or gain on open jobs.
- Bank line of credit, accounts receivable and payable aging.
- The owners' personal financial statements and the signed general indemnity agreement.
- Completed jobs of the same type and size, and any prior default or surety claims.
For a license or permit bond, the review is lighter and usually credit-driven: the owners' personal credit, time in business and any prior bond claims. Many small bonds are quoted from an application and a soft credit pull. Higher credit tiers get a lower rate; applicants with poor credit pay more, may be asked for collateral and may be declined. See license and permit bonds: who needs one and how they work.
An illustration of tiers
Published carrier rate charts show the structure. This one is from Western National Insurance Group's contract surety rate chart, effective for new business January 1, 2017, for Western states other than Texas. It is old, from one carrier, and not a current price. It is useful because it shows how the rate steps down by tier and by the contractor's financial plan.
The chart quotes a rate per $1,000 of final contract price for Class B contracts:
| Tier of contract price | Base rate | Merit rating plan |
|---|---|---|
| First $500,000 | $25.00 | $10.00 |
| Next $2,000,000 | $15.00 | $7.50 |
| Next $2,500,000 | $12.50 | $6.70 |
The chart also shows lower Class A and A-1 schedules for less hazardous work, a $100 minimum premium, additional charges when the completion time passes 12 months, and rating plans (Standard, Preferred, Merit) that require a stated minimum adjusted net worth and at least six of ten qualifying factors.
Worked example using that chart (illustration only). Take a $1 million Class B contract. At the Base rates: $500,000 at $25 per $1,000 is $12,500, and the next $500,000 at $15 is $7,500, a total of $20,000, or 2.0% of the contract. At the Merit rates: $5,000 plus $3,750 is $8,750, or 0.875%. On the same job, the Base-plan premium is more than twice the Merit-plan premium. The same chart, applied to a Class A contract at Base, gives 1.275%. Your own rates will differ by surety, state, work class and year. The surety bond cost calculator lets you try a similar calculation with your numbers, and your agent can show you the surety's filed rates.
Other costs to budget for
- Premium adjusts to the final contract price. Change orders raise the premium, and savings reduce it. The chart above says additional and return premiums over $100 are based on the final contract price.
- Bid bonds. Often issued at no or nominal charge to an established client, so confirm before you bid. If you use the SBA program, SBA charges no fee for bid bonds.
- SBA guarantee fee. Under the SBA's Surety Bond Guarantee Program, the fee for performance and payment bond guarantees is 0.6% of the contract price. It is separate from the surety's premium.
- Collateral. A surety may require cash or a letter of credit when your financial statements are thin or the bond is high-risk.
- Agent and service fees. Some agents charge a fee on small bonds. Ask for the all-in cost.
- Cancellation. Premiums on surety bonds are often largely or fully earned when issued. A mid-term cancellation may not return the premium (minimum earned premium).
- The bid price. Contractors normally price the bond into the bid, since the owner does not pay for it separately. See bid, performance and payment bonds: how contract surety works.
How to lower your rate
- Keep CPA statements current. Deliver year-end statements promptly and consider an upgrade from compiled to reviewed or audited statements as the program grows.
- Build working capital and net worth. Retained earnings and a smaller owner draw raise the program size and qualify you for better rating plans.
- Manage the WIP schedule. Chronic underbilling, fading margins and late reporting are what sureties notice first.
- Fix the owners' personal credit before a renewal or a larger program.
- Use a surety specialist. An agent with several surety markets can compare filed plans and place you in the right class.
- Ask which tier you are in and what moves you up. The jump between plans is the largest lever you have.
To see which companies write the most surety, see the largest surety companies; the pricing logic of ordinary commercial policies is in how commercial insurance premiums are calculated.
Key takeaways
- A surety premium is a rate times the bond amount; it depends mostly on your credit and financial strength, not on expected losses.
- Contract bond rates are filed, quoted per $1,000 of contract price and step down by tier; the same job can cost twice as much for a weaker balance sheet.
- License and permit bonds are priced largely from the owners' personal credit; the agency sets the amount.
- Premiums adjust to the final contract price and are often largely earned when issued, so cancelling may not return them.
- You can lower the rate with current CPA statements, working capital, better WIP reporting and a specialist surety agent.