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
D) $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 A: $3,730
This answer likely results from calculation errors, possibly using incorrect percentages or rounding mistakes in the multi-step calculation process.
Option B: $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 C: $3,530
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.
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?
People Also Study
Related Study Resources
Previous Question
According to OSHA standards, when must the annual summary (Form 300A) be posted in the workplace?
Next Question
A construction company has 25 employees and wants to implement a drug testing policy. Under Florida law, to qualify for workers' compensation premium discounts, the policy must include: