When you’re preparing for a new construction project, estimating your performance bond costs is one of the essential steps. Without knowing how much these bonds cost, you might not be able to afford them, but they are a guarantee that contractors will finish jobs as agreed upon in the contract.
There are a lot of things that affect how much a surety bond cost estimate, and this guide is meant to help contractors, business owners in the building industry, and project managers figure that out. We’ll cover everything from pricing, to key terms, to tips for keeping your construction bond cost manageable.
Table Of Content
What is a Performance Bond?
A performance bond is a type of surety bond required for many public and private construction projects. It ensures that the contractor will complete the work as specified in the contract. If the contractor fails to meet their obligations, the surety company providing the bond steps in to either complete the project or compensate the project owner.
A lot of contractors want to know, "How much does a performance bond cost?" It may seem like a simple question, but the final price depends on a lot of things.
Factors That Influence Performance Bond Costs
There isn’t a one-size-fits-all answer when it comes to cost of performance bond. The total premium will vary depending on several factors, including:
Contract size: Larger contracts typically require larger bond amounts, which leads to higher costs.
Credit score: The contractor’s personal and business credit score plays a significant role in determining the bond premium.
Work history: Sureties assess your past performance on similar projects to gauge the risk involved.
Financial statements: Contractors with strong financials typically qualify for lower performance bond rates.
State Regulations: In California, performance bonds are required for public works projects exceeding $25,000. According to the California Public Contract Code § 7103, any contractor awarded such a contract must file a payment bond amounting to at least 100% of the total contract value before starting the work. Additionally, specific legislation, such as California SB 328, outlines that for construction manager at-risk contracts exceeding $1 million, sufficient bonding is also necessary, and the project bonding requirements must be written using a bond form developed by the county.  Â
How To Calculate Performance Bond Costs
Making accurate project budgets requires knowing the exact steps for figuring out how much a performance bond costs. Let's look at the main factors that affect the bond premium and different ways to figure it out.
Contract Value
The contract value is the foundation of any bond cost calculation. This refers to the total value of the project you’re bonding. If, for instance, your project is worth $1.5 million, this contract value will be used to determine the bond premium. Larger contracts naturally result in higher bond costs, as the premium is based on a percentage of the total value.
Rate Per $1,000 of Contract Value
Most performance bond costs are calculated using a rate per $1,000 of the contract value. These rates typically fall between 0.5% and 3%, depending on factors like the contractor's financial health, experience, and project complexity.
For example, if you are given a 1.75% rate on a $1.5 million project, the formula for calculating the bond premium would be:
-> The bond premium would be $26,250 for a $1.5 million deal in this case.
Blended Rates
In some cases, surety companies use blended rates, which reduce the rate as the contract value increases. This is common for larger projects where the overall bond amount is significant. For example, a surety might apply a rate of 2% for the first $750,000 of the contract and 1.25% for any value above that amount.
For a $2 million project, the bond premium would be calculated as follows:
This structure provides a more flexible, tiered performance bond pricing system, helping contractors budget more accurately for large-scale projects.
Fixed Rate
Some surety providers may offer a fixed rate that doesn't change based on the size of the project. This rate is usually based on how financially stable the contractor is, their credit score, and how much experience they have with jobs like this. A fixed rate is especially beneficial for contractors who consistently manage similar projects, as it simplifies the cost estimation process.
Additional Fees
Beyond the bond premium, contractors may need to factor in additional fees when calculating the total cost of their bond. Some of the most common fees include:
Escrow Fees: Depending on the project, an escrow fee may be required, often ranging between 1% and 1.25% of the bond amount, with setup fees that can cost between $400 and $600.
Credit Report Charges: Surety companies often require a credit report, which may incur additional charges.
Document Fees: Expedited mailing and administrative fees may apply, especially if you need overnight delivery for time-sensitive documents.
Practical Tips for Reducing Bond Costs
Improve your credit score: Pay off outstanding debts and maintain a good credit history.
Maintain strong financials: Keep accurate, up-to-date financial records to show sureties that your business is in good standing.
Build relationships with surety providers: Long-term relationships with sureties can lead to better rates over time.
Bid on the right projects: Know which types of projects are within your capacity to avoid being seen as a high-risk contractor.
Common Questions About Performance Bond Costs
How much does a bond cost for a contractor with bad credit?
If your credit score is below average, expect to pay a higher premium—often between 3% and 5% of the contract value. Surety companies view contractors with bad credit as higher risk, and they adjust premiums accordingly. However, there are ways to improve your credit score over time and reduce bond costs.
Can I include the bond cost in my bid?
Yes, many contractors include their performance bond estimate in their project bid. Just be sure to accurately estimate the costs using your company’s financials and other project details.
Conclusion
Contractors can get a better idea of how much a performance bond will cost and how it will be affected by different factors if they know how the bond rate is figured. Whether it’s working with fixed rates, sliding scale rates, or dealing with additional fees, having clear financials, including solid bookkeeping and accounting, can significantly impact your bond cost.
If you can't figure out how much a security bond will cost or keep track of your money, it might be time to get some help. Professional services like Construction Cost Accounting can take the burden off your shoulders and improve your bond approval chances. Contact us today to maximize your bonding potential.Â
