A project has a contract value of $3,200,000. The owner requires both performance and payment bonds. If the bond premium is 1.2% of the contract value, what is the total cost for both bonds?
Correct Answer
A) $38,400
Typically, performance and payment bonds are priced together. Total bond cost = $3,200,000 × 1.2% = $38,400.
Why This Is the Correct Answer
Performance and payment bonds are typically issued together as a package under a single combined premium. Total bond cost = $3,200,000 × 0.012 = $38,400. The 1.2% rate already covers both bonds as a bundle, so no doubling is needed.
Why the Other Options Are Wrong
Option B: $64,000
$64,000 results from applying 2% to $3,200,000, or from incorrectly doubling a miscalculated figure. There is no basis for a 2% rate given the stated 1.2% premium.
Option C: $76,800
$76,800 results from doubling the correct answer ($38,400 × 2), which would be the error of treating performance and payment bonds as separately priced at 1.2% each. In practice, both bonds are priced together under a single combined premium.
Option D: $32,000
$32,000 results from applying 1% to $3,200,000 instead of the stated 1.2%. This is a rounding or rate-substitution error.
Memory Technique
Bond cost = Contract Value × Rate. One rate, two bonds — they travel together. Think of performance + payment bonds as a 'two-for-one' deal under a single premium. $3.2M × 1.2% = $38,400.
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