What is a bond premium?

A bond premium refers to the cost associated with obtaining a surety bond, which is typically expressed as a percentage of the bond amount. This premium is essentially the fee that the principal (the party required to obtain the bond) pays to the surety company for the guarantee provided by the bond. The percentage can vary based on several factors such as the principal's creditworthiness, the type of bond, and the risk involved.

In contrast, the total cost for the entire contract is a broader term that encompasses much more than just the surety bond premium, including labor, materials, and other associated costs. The fee charged by the obligee for requiring the bond is not standard and does not typically form part of the bond structure; rather, it might relate to the administration of the bond itself. The fine charged if the principal defaults is a consequence of failing to fulfill the obligations guaranteed by the bond, but it is not related to the upfront cost of obtaining that bond. Understanding the bond premium is crucial as it directly affects the overall financial considerations for projects requiring bonding.