A contractor is required to post a performance bond for 15% of contract value on a $1,850,000 project. If the bonding company charges a premium of 1.2% of the bond amount, what is the total bonding cost?
Correct Answer
A) $3,330
First calculate bond amount: $1,850,000 × 0.15 = $277,500. Then calculate premium: $277,500 × 0.012 = $3,330. Performance bonds are typically a percentage of contract value.
Why This Is the Correct Answer
The correct answer follows a two-step calculation process. First, the bond amount is calculated as 15% of the contract value: $1,850,000 × 0.15 = $277,500. Then, the bonding premium is calculated as 1.2% of the bond amount: $277,500 × 0.012 = $3,330. This represents the total cost the contractor must pay to the bonding company for the performance bond.
Why the Other Options Are Wrong
Option B: $3,530
This answer likely results from calculation errors, possibly using incorrect percentages or rounding mistakes in the multi-step calculation process.
Option C: $3,630
This answer suggests an error in either the bond amount calculation or the premium calculation, possibly from using wrong decimal conversions or mathematical mistakes.
Option D: $3,730
This answer indicates significant calculation errors, possibly from incorrectly applying the percentages or making arithmetic mistakes in the two-step process.
Memory Technique
Remember 'Contract to Bond to Premium' - it's always a two-step multiplication: Contract Value × Bond % = Bond Amount, then Bond Amount × Premium % = Total Cost.
Reference Hint
Look up 'Performance Bonds' and 'Contract Security' sections in Florida Construction Law or Business and Finance chapters of exam reference materials.
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