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How do you get a better rate on your surety bonds? It might be as simple as asking.
If you’ve been paying, for example, a 2% flat rate for several years and in that time your company has grown in size and profitability, you may very well be eligible for a lower rate.
Let’s do some simple math: Take a hypothetical job with a contract value of $150,000 and a completion time of less than one year. At a 2% flat rate you would expect to pay $3,000. At a rate of 1.8% you would pay only $2,700, for a savings of $300. Simple, right?
Assuming your surety company utilizes flat rates, and you’re eligible for that lower rate, this scenario sounds like a no-brainer. It’s certainly worth discussing with your surety bond broker.
But here’s where the surety rate game gets a little murkier…
Many surety companies don’t offer flat rate pricing, and only use sliding rate scales, where, for example, you may pay $25 per thousand dollars of contract value for the first $100,000, then $15 per thousand for the next $400,000 of contract value.
At first blush that 2nd “tier” at $15 sounds like a nice decrease. But let’s do the math again, using the same hypothetical $150,000 job. Using a $25 “slide” you would pay $2,500 in premium for the first tier, plus $750 for the second tier at $15/thou. Total: $3,250.
You’ll actually pay more for bonds on that job with the slide than you would with a flat 2% rate. In fact, it would only be on jobs above $200,000 in contract value where you would enjoy rate savings on the $25 slide vs. the 2% flat rate.
What to do? Calculate your average job size for the last 3 years. Ask your surety broker to run some sample surety bond cost calculations based on that average job size. Your broker can then apply some standard rating structures to find the one that works best for your business based on your typical job size, and then negotiate a better rate with your surety company if you’re eligible.
If you get the better rate you’ll be putting more money in your pocket at the end of the year, all else being equal.
Be aware of unscrupulous brokers who will dangle a very low rate in front of a contractor to win the client, only to raise it for the next job. Be sure to get the proposed rate breakdown, in writing, from the surety itself — not the broker.
Also, be mindful of less-than-stellar surety companies. While it’s definitely no guarantee of longevity in this business, a surety company with an “A-” rating or better from AM Best Company is a good place to start the vetting process. In addition, many project owners mandate an “A” or better rating to bid on work.
An experienced surety broker should be able to guide you through this process, getting you the best rates from quality surety companies.
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Source by Mike Dugan
