What is a Bond Premium?
Premium on a Bond
A Bond Premium is actually used in two separate scenarios in writing performance bonds. The first thing that a bond premium refers to is the cost of the bond. Just like it is used in the insurance scenario, the premium is the amount charged for the performance or payment bond (or both, when they are bundled together as a performance and payment bond). The bond premium is a percentage based on the total cost of the job. Typically, for smaller bonds, the bond premium is approximately three percent (3%) of the total job cost. For larger bonds, the bond premium is a smaller percentage of the job cost and some states have a sliding scale for the bond premium (that is, the first $250,000 is 3%, the next $200,000 is 2.5%, the next $200,000 is 2% and so on).
The second way bond premium is used in the industry is that for certain classes of bonds, there is an additional charge to the three percent referred to above. In those cases, say if the company being underwritten is deemed to be riskier than the norm, the bond has an additional premium that is charged. Instead of paying just 3%, the company would pay an additional bond premium of 1.5% for a total of 4.5% of the job.