Cost of Surety Bonds Explained

December 7, 2022 / By: Stampede Insurance Team
Cost of Surety Bonds Explained

If you're a contractor looking to land more projects in industries like construction or real estate, you may be required to get a surety bond. Learn about how much insurance bond cost and the factors that influence bond pricing before getting it.

What is a Surety Bond?

A surety bond is a type of financial agreement made between a principal who performs a task or service—an obligee who is on the receiving end of said task or service, and a surety, a bond or insurance company that ensures the agreed upon task or service is carried out.

The principal is usually a contractor who purchases a surety bond to help their clients mitigate the risks of working with them. By purchasing a surety bond, the contractor assures the client that in the unlikely event, they don't deliver on what has been promised, there is financial compensation.

Such a promise increases business confidence and encourages bigger projects. Hence, surety bonds are typically bought by businesses in industries such as construction, business licensing, and auto dealers.

What are the Different Kinds of Surety Bonds?

There are two main types of surety bonds, a contract bond helps protects businesses by ensuring contractors fulfill their end of the contract.

The second type of surety bond is a commercial bond which ensures businesses or individuals have the necessary credentials and requirements in order to work with the federal government.

Types of Contract Bonds

There are several types of contract bonds. The first type is performance bonds which protect businesses from the possibility of a contractor not completing their end of a contractual agreement. The surety will pay the obligee for financial losses caused by the unfulfilled work on behalf of the principal.

There are also payment bonds that protect staff, subcontractors, and clients in the event of late or nonpayment. The surety pays the staff, subcontractors, and clients for services rendered on behalf of the principal.

Then, there are bid bonds that protect companies by ensuring that the bidding company fulfills the terms of the project should their bid be selected. The surety pays the company for the resulting financial losses of the bidding contractor winning a bid and not fulfilling the terms of the contract.

Lastly, there are ancillary bonds that protect companies by ensuring contractors fulfill the other terms of an agreement. This type of contract bond works with performance bonds to help ensure that not only do contractors fulfill their end of the agreement but that they also have the other requirements needed to perform their task.

How Much Does a Surety Bond Cost?

A surety bond cost, also known as the bond premium, depends on the total bond amount or the amount of financial protection covered by the bond, the creditworthiness and financial stability of the principal, and the specific type of surety bond.

The surety bond rate usually ranges from about 0.5% to 3% of the total bond amount for businesses that are low risk. Meanwhile, the bond premium can reach up to 20% for high-risk businesses. The level of risk a business has is influenced by a company's credit history.

When a business has a good credit score, a surety company will perceive it to have a lower risk, whereas if a business has a bad credit score, the surety company will consider it to have a higher risk.

The type of surety bond also impacts the cost of the premium. A contract bond, like a performance bond or payment bond, typically costs more than a commercial bond which is more concerned with licensing and permits.

Which Businesses Require Surety Bonds?

Surety bonds are typically required of businesses in industries that involve high-risk or long-term projects. Some industries that require surety bonds are construction, business licensing, and real estate.

Other situations where require surety bonds are required include legal proceedings and performing public service. Some court proceedings also require a surety bond as a condition to be released from custody or as a guarantee to pay for damages.

Some public officials, such as notaries or clerks, also require surety bonds to ensure they perform their obligations on time and professionally.

How to Purchase a Surety Bond for Your Contractor Business?

A bonding insurance cost can vary based on several factors. Save time and money by choosing our team of financial experts. Our extensive knowledge allows us to easily compare insurance policies from the top U.S. providers and help you get your certificate fast by making the application process faster.Every business is different. To get a free quote on your ideal insurance policy based on your business situation, fill out our online form or contact us at 888-306-7887 at Stampede Insurance Services today!

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