Bond cost are often a considerable part of budgeting as a contractor. While running a construction business means taking care of many different tasks and expenses, often administrative and legal, many factors play a role in terms and conditions of bonding.
Due to the importance and prominence of bonding in the construction industry, it is a good idea to know how surety bonds work, and as a result, how you can potentially reduce the capital that you would need to put aside for obtaining them. One of the first steps that you need to address to launch a contracting business is to obtain a state license, and this entails providing a contractor license bond, therefore being one of your first business expenses. So it is important to know the elements that affect the cost of your contractor license bond, so that you can work on improving them and thus reducing the rate of your bond.
The assessment of both personal and business criteria is part of the bond approval process for all types of surety bonds. This is done to estimate the level of bonding risk the surety is considering taking on. The lower it is, the smaller the bond premium would be. In the case of contractor license bonds, the most important factors considered include:
Personal credit score of the business owner(s) contributes about 40% in the bond price analysis, so it is quite important. Working on your credit prior to applying for a bond is recommended If you want to pay less for your license bond.
Your credit report will be pulled (soft pull), so clearing outstanding payments can help reduce your bond premium.
Business financials contribute about 30% in the cost analysis. The more credible and stable they are, the better.
Being able to show strong personal finances, liquid assets such as cash, marketable investments, real estate, can bring down your bond cost too.
The cost of contract bonds is determined in a slightly different way than that of license bonds. Personal credit and business financial statements are part of the formulation here as well. For smaller bond amounts, the credit score of the business owner(s) would be the main factor, in the bond formulation. For larger bonds, the sophistication of the business documentation would play a large part. The more credible these documents are, the smaller your bond cost is likely to be.
However, several other factors also affect the bond price, such as:
The history of successfully completed construction projects can reduce your contract bond cost, as they show you are able to start to finish cash flow and perform to contract.
The size of the contract impacts the cost as well. Larger bond requirements typically mean smaller percentage, can be between 1% to 1.5% of the required amount.
This is not a tell all for bonding and how to improve bond rates, but is a good start of items to improve upon.