Cost of the Bond
The premium charged by the surety is not considered a loss-funding technique and does not contemplate loss. The surety’s premium charge is a fee for the third-party credit and performance guarantee, similar to a loan fee charged by the bank.
While rates may vary among surety companies, The Surety and Fidelity Association of America provides advisory rates of one to three percent of the contract amount dependent on the size, type, and duration of the project. There is generally no direct charge for the bid bond, and in many cases, performance and payment bonds incorporate a one year maintenance bond into their pricing structure.
When bonds are specified in the contract documents, it is the contractor’s responsibility to obtain the bonds. The bidding contractor generally includes the bond premium amount in the proposal and the premium is payable upon execution of the bond. If the contract amount changes, the premium will be adjusted for the change in contract price at the completion of the project.
Much discussion has evolved regarding the adequacy of fees charged for surety yet few changes have actually occurred over the course of its more than 100 year history. Consequently, the surety industry’s reaction to losses is manifested in dramatic swings in tightening or loosening of underwriting philosophy.