How much is my surety bond going to cost me?
This is probably the most common question we are asked with regard to surety bonds, however this is like asking how many fish are in the sea, how many birds are in the sky or how many animals are in the forest. In order to answer any of these questions, we have to narrow down to a measurable metric, which in this case means we need to identify the specific bond in question. Just like fish, birds and animals, there are thousands upon thousands of surety bond types. In order to understand what a surety bond costs, we need to understand the specific bond that is being requested.
Surety bonds can be segregated into 4 separate categories:
- Contract Surety Bonds
- Commercial Surety Bonds
- Court Surety Bonds
- Public Official Surety Bonds
Contract Surety Bonds
A contract bond provides specific guarantees that the contractor will perform according to the terms of an underlying contract for the duration of a project. Contract surety bonds – also commonly referred to as construction bonds or bid, payment and performance bonds – are required in the construction and development industry. These types of bonds typically insure that a contractor will pay all labor and material suppliers used over the course of a project. Contract bonds provide financial security to the project owner and, in most cases, are required before work on a project can get started.
Contract surety is a category that covers multiple sub-bond types including Bid Bonds, Payment Bonds, Performance Bonds, Supply Bonds, Maintenance and Warranty Bonds. Each of these types of bonds has its specific role in protecting the obligee/project owner.
Commercial Surety Bonds
A Commercial Surety Bond is an all-encompassing term that covers a large spectrum of different surety bond types. Also referred to as License, Permit and Miscellaneous bonds, these bonds are required in order to operate a business, secure a license or permit or meet a miscellaneous requirement within a particular state, city, county or municipality and guarantees that the business will abide by the laws, statutes or codes during their business operations. The proceeds of the bond are typically for the benefit of those harmed by the actions of the licensee and/or to pay punitive fines to the governing body.
Court Surety Bonds
Court Surety Bonds are commonly required in most court proceedings and fall into two distinct categories:
- Judicial Court Bonds provide a financial guarantee to protect opposing or other injured parties from any financial loss that may arise as a result of the court action. The two main categories of Judicial Court Bonds are Plaintiffs Court Bonds and Defendants Court Bonds, each providing specific remedies to protect the parties involved in the legal proceeding.
- Probate Bonds are required in cases where an individual is named to oversee the assets of another, whether they are a minor, incapacitated or deceased person. These bonds protect the individuals or heirs from the fraudulent actions of the fiduciary in their handling of the estate. Administrator/Executor Bonds are required for the handling of the estate of a deceased individual. Conservator/Guardianship Bonds are required for handling the assets of a minor or incapacitated individual.
Public Official Surety Bonds
Public Official surety bonds are a financial guarantee that the elected/appointed official will truthfully and faithfully execute the duties of their office as prescribed by law and are for the protection of the citizens and taxpayers whose money they have been entrusted to handle.
Once you have identified your specific bond, it is much easier to estimate the surety bond premium or cost. Typically a surety bond is issued for a defined term, usually 1 year. The premium will be based upon numerous factors, including but not limited to the following:
- Risk associated with the specific bond
- Creditworthiness/financial strength of the applicant
- Language on the specific bond form
A typical Contract Surety Bond will run between 1.5-3% of the total bond amount being requested.
A typical Commercial Surety Bond will run between 1-5% of the total bond amount being requested.
A typical Court Surety Bond will run between 1-5% of the total bond amount being requested.
A typical Public Official Surety Bond will run between 1-3% of the total bond amount being requested
Things such as bad credit, weak financial position, bad language in the bond form, and higher risk associated with the bond will also adversely affect the rate. Programs are available for adverse bonds/applicants and the rates typically associated with them can go as high as 25% of the total bond amount. Other requirements may include:
- Collateral – Cash or an Irrevocable Letter of Credit provided by a bank that will be held by the surety company as a secured position in the event the surety bond has a claim filed against it. This is a requirement when the applicant does not meet the minimum underwriting requirements of the surety, or when the risk associated with the bond type merits this requirement.
- Co-Indemnitor (Co-Signor) – An additional guarantor with strong credit or additional financial strength is added to the submission to help overcome shortages of the business owners credit or financial strength.
These can affect the rate charged for the bond in either direction. Some surety companies will lower the rate due to being more secure in their obligation, whereas others will increase the rate slightly due to the additional work involved in underwriting or maintaining the collateral.
As you can see, there is no easy answer with regard to “How much does a Surety Bond cost?” as there are multiple factors that can affect the cost of the bond. The easiest way to get an actual rate for your required surety bond is to apply online at A1SuretyBonds.com or call our office at 800-737-4880 to speak with an underwriter who will help guide you to your final price.