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In 2019, the North American surety market was valued at US$ 8,573.43 million and projected to reach US$ 25.18 billion by 2027, according to The Insight Partners. New businesses open every day despite the latest recession and inflation, and the insurance and surety industries will continue to play a vital role in protecting companies’ interests and financial stability.
So, as a new business owner who needs surety bonds to get your licenses and sign contracts with clients, you may wonder: what does a surety bond cost? You may be asking yourself the same question even if you are a seasoned business person and suddenly find yourself needing a new surety bond for your company.
The answer to this question is not simple, and you’d need an expert to calculate your surety bond premium for you, as many factors influence the amount you’ll have to pay to get bonded. Let’s look at how the bonding process works, what types of surety bonds exist, and how sureties calculate your premium.
How Does the Bonding Process Work?
A surety bond is a contract between three parties: the obligee, the principal, and the surety. The obligee is the party that requires the principal to obtain a surety bond from the surety. To explain it plainly, you are the principal, and the obligee is a government institution or agency that requires a surety bond or a private party who contracts your services.
The surety bonding process is designed to protect the obligee from losses caused by the principal’s failure to meet their obligations. The surety bonding process typically works as follows:
- The obligee (the entity requiring the bond) requests a bond from the principal (the contractor or company executing the bond, in this case, you).
- You apply for the bond with a surety company of your choosing.
- The surety company reviews the request to determine the risk involved in issuing the bond.
- If the surety company approves the bond, they will provide you with a quote and the premium they require you to pay to get bonded.
- If you accept the quote, you pay the agreed premium and receive the bond.
- The obligee requires you to post the surety bond as collateral for your work.
- If you fail to meet your obligations, the surety company will pay damages to the obligee up to the bond amount.
- You will then have to reimburse the surety for the total amount of the bond, as a surety bond works similarly to a bank loan.
Relying on a recommendation from someone they trust helps companies and individuals choose a contractor to hire for a job. Also, people prefer hiring contractors who can prove they run a trustworthy and financially responsible business, which usually means the contractors should be licensed, bonded, and insured.
Getting insurance and adequate surety bonds for your business means that you are financially responsible and take your work and the future of your business very seriously. If you are unsure what surety bonds you need to obtain, here’s a brief guide on the major types of surety bonds.
Types of Surety Bonds
If you have researched surety bonds before, you probably noticed how many different types exist in the market. Most surety bonds fall into four categories: contract bonds, commercial bonds, fidelity bonds, and court bonds.
Contract Bonds are surety bonds that guarantee the contracted party will comply with the terms of a contract. Construction contractors usually need this type of bond to assure their clients that they will complete the project they have taken on. If the business fails to do so, the surety company will be required to pay any resulting losses up to the amount of the bond.
In close-to-ideal circumstances, you can expect a contract bond to cost between 1% and 5% of the bond amount.
Here are some types of contract surety bonds:
- Performance bonds: A performance bond is a surety bond that guarantees the completion of a specific project according to the terms and conditions outlined in the contract. They ensure the end result is satisfactory to the client and that the contractor respects all specifications from the agreement.
- Bid bonds: A bid bond is a surety bond that guarantees that a contractor will honor their bid price and terms if they are awarded the project. The contractor needs to post a performance bond along with the bid bond.
- Payment bonds: A payment bond is a surety bond that guarantees that a contractor will pay their subcontractors and suppliers for work performed on the project.
- Maintenance bonds: A maintenance bond protects the property owner from losses resulting from the contractor’s failure to maintain the property properly.
Businesses need commercial bonds to guarantee that they will comply with all applicable laws and regulations. That means that contractors need proof of having this surety bond to ensure the state recognizes them as legal entities and provides them with their licenses. The commercial bond premium is typically 1-3% of the bond amount.
The most common type of commercial bond is a license and permit bond. A license and permit bond is a surety bond that guarantees that a contractor will comply with all local, state, and federal regulations pertaining to their work. Mortgage broker, auto dealer, or notary public bonds are some examples of the bonds that fall into this category.
Fidelity bonds protect the company and its clients from any unlawful employee actions, such as theft or disloyalty. The name itself indicates that they guarantee the fidelity of company employees. If an employee steals from the company or commits any other type of dishonest act, the surety company will be required to pay any resulting losses up to the amount of the bond.
Fidelity bonds function as “blanket bonds,” meaning that when a business purchases this bond, it covers the company and its customers from the wrongdoings of all company employees. You would need to pay a small percentage (sometimes even less than 1%) of the bond amount to get bonded. Fidelity bonds include:
- Business service bonds are the most common fidelity bond that protects the obligee (client) from losing their assets due to the dishonest act(s) of one or more principal’s employees.
- Employee dishonesty bonds protect the principal from any employee malpractice acts. An employee dishonesty bond functions similarly to an insurance policy.
- ERISA bonds are surety bonds that are required by businesses that offer employee benefits, such as 401(k) plans. The bonds protect employees from losses caused by the company’s mismanagement of the plan.
People often buy a court bond (otherwise known as a judicial bond) voluntarily to protect themselves or their company from potential losses during court proceedings. They fall into two major categories, defendant bonds and plaintiff bonds.
For example, appeal and bail bonds are defendant bonds. A bail bond ensures that the defendant will appear for their court date, and it typically costs between 10-15% of the total bail amount. If the person does not show up, the surety company will be required to pay the bail amount. Appeal bonds guarantee that a person will pay the costs of an appeal if they lose their case.
Plaintiff bonds are a type of surety bond used to ensure that a plaintiff will pay the costs of a lawsuit if they lose their case.
Also, a judge may require that you purchase a court bond to guarantee that you will comply with the terms of a court order. A court cost bond ensures that the court receives the payment of all court costs.
What Influences Your Surety Bond Cost?
The cost of a surety bond will vary depending on the specific bond type, the size and risk of the project, the contractor’s financial history, and other factors. Let’s look more closely at these factors and how they affect the surety bond premium.
- The type of surety bond you’re purchasing: The type of bond is essential because it determines the risk the surety company is taking. For example, a construction bond is typically more expensive than a business license bond because there is more risk involved in construction projects.
- Bond amount: Some bonds have pre-determined amounts and premiums, like notary or auto dealer bonds. Those are usually the bonds the state requires professionals to obtain to receive their licenses to do business. The amount of other bonds depends on the details of the project and the involved parties.
- Your credit score and credit history: Simply put—the better your credit score, the lower the premium. If your credit score is strong, your premium could be as low as 1% of the bond amount. Sureties assess the risk they take when providing you with the bond, and your credit history is an important factor there. Persons with bad credit scores can expect to pay up to 15% of the bond amount in premium.
- The state you operate in and the regulatory authorities that require the bond: This is particularly true of the pre-determined bond amounts and premiums, but it can also influence the cost of other bonds.
- The industry you are in and the project size: Some industries carry more risks than others. For example, construction contractors may expect to pay around 10% in premium for their projects.
- Your experience in the industry: More experienced professionals are less likely to get stuck and abandon projects halfway. Also, they are more likely to avoid claims by not making professional mistakes.
Finally, surety companies will also consider the length of time for which you need the bond. If you need it for a shorter period will generally be less expensive than those you need for a longer time.
Now that we know all these elements that influence your surety bond premium let’s crunch some numbers together. For a lower-risk industry, for the $10,000 surety bond, depending on your credit score, you can expect to pay between $100 and $1,500 in premium.
If you work in a riskier industry and don’t have much experience in your given field, you may need to set aside a larger amount of money. For example, if you need a $30,000 bond for a project you signed on to do, your premium may go up to $4,500.
Your surety bond cost will also depend on the bond provider you work with to obtain your bond. The surety company should be a reliable, financially-stable company that meets all the requirements the obligee puts forward.
If you don’t have the time to research the market on your own, consider partnering with a broker who can find the best option for your business. If you need more information about the process, you can contact one of Embroker’s experienced brokers via Drift. If you are ready to get your quote, you can get one online by signing up to Embroker’s digital platform.
You may be wondering: construction insurance vs. surety bond—which do I need for my business? The answer is—both.
What are the advantages of getting licensed, bonded, and insured as a business? What do customers view as the main advantages of hiring companies that are licensed, bonded, and insured?