What Is a Contractor License Bond?

What Is a Contractor License Bond?
04/21/2020
A contractor’s license bond serves tons of purpose for most construction projects. One of these bonds works as a surety bond, which helps both the contractor and the one receiving contracting service. Contractors license bonds protect the following three parties:

  • You
  • The company who hired you
  • The state bond issuing agency

When you obtain a contractor’s license bond, that is used to ensure that you’ll always provide ethical and professional services. This type of bonding is also used to ensure that the contractor will do zero harm to the public by providing these contracting services. If an unethical decision is made and someone is negatively affected, then that can result in a claim filed against the bond, which can lead to financial compensation.

Contractor Bonding Requirements by State

Being a part of a broader contractor license bond category, contractor license bonds must be filed with the government agency that is responsible for regulating contracting activities in the contractor’s jurisdiction as a condition of licensure for most contractors. States handle contractor licensing differently — while many of them handle it directly, other states allow local municipalities to regulate and license contractors. Whether you’re in Arizona, Florida, Nevada, or Washington you must check the requirements for your specific state.

Who is Protected by a Contractor Bond?

Many people believe that a contractor license bond works just like normal insurance, but that is not the case at all. Unlike insurance policies that protect the purchaser of the insurance, contractor license bonds are used to protect the clients of the contractor and the state in which the contractor does business in. Essentially, it works like insurance for others, paid by you, the contractor.

When should a contractor be bonded?

Getting bonded as a contractor is a smart idea for many reasons. And, ultimately, getting bonded is a requirement for a contractor license in many states. But aside from that, these surety bonds tell your clients that you’re a trusted source for the work. These surety bonds provide a high level of peace of mind in case things go wrong.

How Much Does a Contractor Bond Cost?

To determine the price of a contractor bond, it depends on many factors. These factors include:

  • Type of contractor
  • Total cost of service
  • Credit score
  • Total surety bond amount

There are thousands of different surety bonds out there and many of them have their own cost structure. However, a key thing to remember is that you do not need to pay the full surety bond amount. Generally, the monthly price you pay is typically 1-15% of the total bonding amount. The amount you’ll pay for bonding is based heavily on your credit score.

What percentage do I need to pay?

Contractors rarely pay over 15% of the total bond amount. In fact, the percentage can be as little as 1%. To get an example of how this works, think of a $10,000 surety bond where you get quoted at a 1% rate. For this surety bond, you will pay $100 every month. For higher risk bonds, like construction bonds, these can cost upwards of 10% or more of the total bond amount.

How can I decrease my contractor bond cost?

Due to the fact that your bond rate is directly affected by your credit score, this rate can improve if you improve your credit score. There are additional ways to decrease your bond cost, such as choosing a different type of bond, lowering the bond amount, and making better financial and ethical choices.

Can I get bonded if I have a low score?

If you have a credit score low enough, then you may not be qualified to receive a surety bond. However, there are typically bond options for everyone — even those who have a below-average credit score. But if you do have a low score, then you’ll be forced to pay a higher premium based on a percentage of the full bond amount.

Contractor License Bond Claims: What You Need to Know

Although it’s a very good idea to understand contractor license bonds, including the average bond amounts, it’s also smart to understand how the claims process works. However, you’ll want to try your best to avoid claims at all costs. The surety bonds claim process can be very lengthy and costly, not to mention that it can cause a lot of harm to your business. That being said, try your hardest to resolve disputes with the customer before moving to a claim. If a claim needs to be filed, then contact your bonding company to discuss the next steps.

What happens if a claim is filed

In the event a claim is filed, then the bonding company will assume that you’ll take care of the claim. If you fail to complete this step, then the Surety will usually conduct an investigation to determine the claim’s validity.

Difference Between Contractor License Bonds and Contract Bonds

When it comes to state contractor bonds, it’s important to understand that there are different types. Aside from surety bonds, there are also contract bonds that include performance and payment bonds. These types of bonds are often required on specific federal or state projects.

How do you become a licensed and bonded contractor?

In most cases, there are several steps needed to receive a bond contractor license. Here are the six steps involved in the whole process:

  • Determine your desired type of work
  • Study educational requirements
  • Train properly
  • Develop a business plan
  • Obtain a contractor license and surety bond
  • Manage your place of business

Apply For Your Contractor License Bond

The majority of states make it a requirement to be bonded before receiving a general contractor license. To get a bond, you’ll first need to work with a bonding company to submit an application. They will then give you a quote, and you’re free to choose their options or check other providers. These companies can take care of the whole process for you, and they might even give you a free quote.

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