How Much Does a Performance Bond Cost?

The cost of a performance bond is determined by various factors, including the contract amount, the contractor's creditworthiness, and the type of project. A general rule of thumb is that performance bonds cost between 1-3% of the contract value, but the percentage can vary based on risk and other considerations.

What is the Cost of a Performance Bond?

The average cost of a performance bond is usually around 3% of the contract amount, although this can fluctuate depending on several factors:

For smaller contracts (under $1,000,000), costs typically range from 1.5% to 3%.
For larger contracts or contractors with strong financial records, the cost can be driven down to as low as 1%.
Riskier projects or contractors with poor credit may face higher premiums, often around 4-5%.

Example Calculation:

Contract Value: $250,000
Bond Cost at 3%: $7,500

Use our Performance Bond Cost Calculator to estimate the cost for your project.

Factors That Affect Performance Bond Costs

Contract Value
The bond cost increases with the size of the project. Larger contracts often receive lower rates as a percentage of the total value, especially for contractors with a proven financial track record.
Contractor’s Credit and Financial History
- A contractor with a strong credit score and reliable financials can expect lower premiums.
- Contractors with poor credit may face premiums closer to 4-5% of the contract amount.
Project Type
Certain projects are deemed riskier by surety companies, such as complex construction jobs or projects in volatile markets, which can lead to higher premiums.
Location
State-specific regulations and project conditions can impact the bond rate. For example, public works projects often have unique requirements.
Duration
Longer project durations may result in higher costs due to the increased risk associated with extended timelines.

Who Pays for a Performance Bond?

The contractor pays for the performance bond. However, this cost is usually included in the contractor’s bid price, meaning the project owner (obligee) indirectly bears the cost. It’s essential for contractors to factor the bond cost into their project bids.

Contractor Tip: Be sure to include the bond cost in any change orders to cover adjustments in project scope.

Performance Bond Cost for a $1 Million Contract

For a $1 million contract, the cost of a performance bond generally falls within the following ranges:

Good Credit and Financials: 1% of the contract price ($10,000).
Average Credit: 2-3% ($20,000-$30,000).
Poor Credit or Risky Projects: 4-5% ($40,000-$50,000).

How Are Performance Bonds Calculated?

Performance bonds are calculated as a percentage of the contract amount.

Low-Risk Projects: 1% to 2%
Moderate Risk: 2.5% to 3%
High Risk: 4% or more

Key Variables in the Calculation:

Financial strength of the contractor.
The bond's coverage amount (sometimes the penalty amount differs from the total contract).
Type of project (residential, commercial, or public works).

Learn more about how performance bonds are calculated.

Benefits of a Performance Bond

Assurance for Project Owners: Guarantees the contractor will complete the project as specified.
Timely Completion: Ensures work is done on schedule.
Vendor and Subcontractor Payment: Protects against liens and ensures all subcontractors and suppliers are paid.
Mitigates Financial Risk: Reduces the risk of financial loss due to contractor default.

Drawbacks of a Performance Bond

Additional Costs: Contractors must pay 1-3% of the contract price for the bond.
Potential Claims Denials: Surety companies may deny claims based on strict contract terms.

Other Costs Associated with Performance Bonds

In addition to the standard bond premium, there may be additional fees, including:

Escrow Fees: 1-1.5% of the bond amount plus a one-time setup fee ($500-$750).
Credit Report Fees: Charges for reviewing the contractor’s credit.
Administrative Costs: Overnight mailing fees or brokerage fees in certain cases.

Common Questions About Performance Bonds

Do You Get Your Money Back?

Performance bond premiums are typically non-refundable. However, if the bond is never submitted to the obligee or is canceled before the project begins, you may be eligible for a partial refund.

When Can You Release a Performance Bond?

The bond can usually be released after:

Practical completion of the project.
All defects have been resolved.

Learn more about releasing performance bonds.

How Long Does a Performance Bond Last?

Performance bonds typically last for the duration of the project. In some cases, they may extend to cover a warranty or defect liability period.

How to Lower the Cost of a Performance Bond?

Maintain a strong credit score.
Provide clear and accurate financial statements.
Work with an experienced surety provider like Swiftbonds to negotiate better rates.

Conclusion

The cost of a performance bond generally ranges from 1-3% of the contract value, depending on factors like the contractor’s creditworthiness, project type, and duration. By understanding the variables that affect bond pricing and working with a trusted surety provider, you can secure competitive rates and protect your projects effectively.

For accurate quotes and expert guidance, contact Swiftbonds.