Running a construction business means taking care of different tasks and expenses, many of them administrative and legal. As you need to obtain surety bonds in your operations as a contractor, the bonding costs are often a considerable part of the budget.
Due to their importance and prominence in the construction industry, it’s a good idea to know how surety bonds work - and consequently, how you can reduce the finances that you have to put aside for obtaining them. Among the first steps that you have to undergo in order to launch a contracting business is to obtain a state license, and this entails providing a contractor license bond. This makes getting bonded one of the first business expenses that you have to meet. That’s why it’s important to know the factors that affect the cost of your contractor license bond, so that you can work on improving them and thus reducing the price tag.
For all types of surety bonds, the surety provider assesses various personal and business criteria of the bond applicant, so that it can estimate the level of bonding risk. 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 contributes about 40% in the bond price formulation, so it is quite important. If you want to pay less for your license bond, you can work on boosting your credit score.
● Your credit report matters as well. Clearing outstanding payments can help reduce your bond premium.
● Business financials contribute about 30% in the cost formulation. The more stable they are, the better.
● Showcasing strong personal finances such as cash, investments, and assets can bring down your bond cost too.
The cost of contract bonds is formulated in a slightly different way than that of license bonds. Personal credit and business financial statements are considered here as well. For smaller bond amounts, the credit situation of the business owner would be the main criterion in the bond formulation. For larger bonds, the business paperwork would also be a must. The more solid these documents are, the smaller your bond cost is likely to be.
However, a number of other factors also affect the bond price, such as: ● Past history of successfully completed construction projects can reduce your contract bond cost, as they show you are trustworthy.
● The size of the contract impacts the cost as well. Larger bond requirements typically mean smaller percentage, usually between 1% to 1.5% of the required amount.
● The type of work you would have to execute under a contract may also matter for the surety, as some areas are considered higher risk than others.
You can find further information on bond cost formation in my free ebook. Click here to download.
