Bond premium

The bond premium, also called the bond fee, is what a contractor pays its surety company for the performance and payment bonds on a contract it has been awarded. It is a real job cost, and it is the "Bond" line in a bid summary.

It is not the same thing as a bid bond. A bid bond goes in with the bid, and its amount (a percentage of the bid) is a guarantee the surety stands behind, not money you pay. The bid bond itself usually costs little or nothing. The premium is what you pay once the job is yours and the performance and payment bonds are issued.

How the premium is priced

• On the contract value. The premium is figured on the contract amount, so it is added after overhead and profit, on the full price.
• On a sliding scale. Most sureties quote a rate per $1,000 of contract value that steps down as the contract gets larger: a higher rate on the first band, lower rates on the bands above it.
• Set by your surety. The rates depend on your company's financial statements, credit, experience and record. Two contractors bidding the same job can pay different premiums. Ask your surety or bonding agent for your current schedule.
• Adjusted with the contract. Change orders that raise the contract amount usually raise the premium. Ask how your surety handles them.

Example

Using a schedule made up for this example only (not any carrier's rate): $25.00 per $1,000 on the first $100,000, $15.00 on the next $400,000, $10.00 on the next $2,000,000 and $7.50 on the next $2,500,000. On a contract of $1,200,000:

1. First $100,000: 100 x $25.00 = $2,500.00
2. Next $400,000: 400 x $15.00 = $6,000.00
3. Remaining $700,000: 700 x $10.00 = $7,000.00
4. Premium: $2,500.00 + $6,000.00 + $7,000.00 = $15,500.00

If the same job also needed a 10 percent bid bond, that $120,000 would appear nowhere in the price. It only limits what the surety could owe the owner if you refused to sign.

Where it goes in the bid

Put the premium last in the bid summary, after markup and profit, because the surety charges on the full contract amount. Strictly, the contract amount includes the premium itself, so some estimators make one more small pass; others accept the difference, since the premium is trued up to the final contract amount later.

Keep the premium as its own line rather than folding it into overhead. That way it can be left off a job that needs no bonds, and it is easy to check against your surety's schedule.

In IntelCost's estimating, the bid summary adds bond after tax, overhead, extra markups and profit, each on the running subtotal, ending in the bid total. The guide on how to build a bid summary works the premium through a full example.