It is difficult to ascertain what the final contract price will be on a construction contract. As such, it is equally difficult to ascertain what the final premium due to the surety will be, because the one is tied to the other.
The premium on surety bonds is the value received by the surety bond company whereby they undertake the underwriting process necessary to evaluate, and assume a particular risk. The premium is generally based on the final contract amount. This amount may be different from the initial contract amount, or even from the bond amount itself.
The word “final” is important to note, as the initial contract amount and premium may differ by the end of the project. A contract price may be more or less than the initial amount, and the final premium due is based on this number. Thus, a surety bond premium may be more or less than the initial premium.
If the final contract amount is greater than the initial amount, additional premium will be due. Conversely, if the final contract amount is less than the initial amount, a portion of the premium will be returned to the contractor.
Surety bond companies use a variety of methods to discover the final contract amount. The most typical among them is to find the amount on the contractor’s Work-in-Progress Schedule (WIP), and or they receive a signed Status report directly from the owner that will specify the final contract amount.
As a project progresses, and additive change orders are included, it is important to accrue for the additional premium so that you can bill the owner for the additional cost. It is also important to get a final tally on the final premium and all other ancillary costs so that your actual profit on the job can be determined.
