How bond premiums are charged
A surety doesn’t charge one flat percentage. It charges a rate per $1,000 of contract amount in tiers, much like income tax brackets. Every contract pays the first-tier rate on its first $100,000, the second-tier rate on the next slice, and so on. The bigger the job, the more of it falls into cheaper tiers, so the blended rate drops as the contract grows.
A typical standard-credit schedule looks like this:
| Contract amount | Rate per $1,000 |
|---|---|
| First $100,000 | $25.00 |
| Next $400,000 (to $500,000) | $15.00 |
| Next $2,000,000 (to $2.5 million) | $10.00 |
| Next $2,500,000 (to $5 million) | $7.50 |
| Next $2,500,000 (to $7.5 million) | $7.00 |
| Over $7.5 million | $6.50 |
These rates are typical ranges, not any surety’s filed rates. Every tier in the estimator is editable, so you can paste in the schedule your agent gave you.
Credit bands
Sureties sort contractors into rough bands based on how much risk they see:
- Preferred: CPA-reviewed or audited financials, strong working capital and net worth, a long record of completed bonded work. Rates can be 30% or more below standard.
- Standard: good personal credit, reasonable financial statements and a few years of similar work. Most established subcontractors and small GCs are here.
- Substandard: newer companies, thin working capital, past credit trouble or a first bond. These are often written through specialty programs at two to four times standard rates, sometimes with collateral or funds control.
Picking a band loads that band’s typical schedule. The chart then compares the same contract across all three bands, which shows what better financial statements are worth on your next bond.
What the estimator calculates
- Performance and payment bond premium: each tier’s slice of the contract times its rate, added up. If the result is below the minimum premium (commonly $250 to $1,000), the minimum applies.
- Bid bond: the penal sum (the amount at risk if you win and walk away) and any fee your surety charges to issue it.
- Change order true-up: the premium on the contract plus your expected change orders, minus the premium already paid. Sureties bill this when the job closes out.
- Bid with bond: the premium is charged on the contract price, and the contract price includes the bond. If your number doesn’t include the bond yet, the estimator solves for the price that covers its own premium.
A worked example
An electrical subcontractor is bidding a school addition at $1,850,000. The prime contract requires 100% performance and payment bonds, a 10% bid bond, and the company has standard credit.
| Tier | Amount in tier | Rate per $1,000 | Premium |
|---|---|---|---|
| $0 to $100,000 | $100,000 | $25.00 | $2,500 |
| $100,000 to $500,000 | $400,000 | $15.00 | $6,000 |
| $500,000 to $2,500,000 | $1,350,000 | $10.00 | $13,500 |
| Total | $1,850,000 | $22,000 |
The premium is $22,000, a blended 1.19% or $11.89 per $1,000. The bid bond carries a penal sum of $185,000 and a $150 fee.
School jobs pick up change orders. At an expected 8%, the final contract reaches $1,998,000 and the premium on that is $23,480, so the surety will bill about $1,480 more at closeout. Total bond cost for the job: $23,630.
If $1,850,000 was the price before the bond, bidding $1,850,000 + $22,000 isn’t quite enough, because the extra $22,000 is bonded too. The price that covers its own premium is $1,872,222, which adds $22,222.
The same contract would cost about $14,950 at typical preferred rates and $49,750 at substandard rates. That $35,000 swing on one job is why sureties and contractors spend so much time on year-end financial statements.
Bond cost is a real job cost. Carry it as its own line in your estimate, not buried in overhead, so it scales with the price and shows up in change orders.
Common mistakes
- Using a flat percentage. Multiplying the contract by 2% overstates bonds on big jobs and understates them on small ones. Use the tiers.
- Forgetting the minimum premium. A small bonded job can cost several times what the tier math says.
- Leaving bond out of change orders. The surety bills premium on the final contract whether or not you priced it into your changes.
- Ignoring subcontractor bonds. If you require bonds from your subs, their premiums are in their prices. Level bonded and unbonded bids on the same basis.
- Treating the bid bond as free money. The fee may be zero, but the penal sum is real. Don’t bid work you won’t sign.
Related tools
To compare subcontractor quotes that do and don’t include a bond, use the bid leveling matrix. Before you spend time and a bid bond on a job, run it through the bid / no-bid scorecard. Bonded public work often comes with retainage and slow pay, which you can plan for in the cash flow and retainage forecaster.