What Is a Contractor License Bond?

Rose Morrison

Sep 15, 2022

what is a construction license bond

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During the construction process, clients want to be protected against any financial burdens. They also want to hold contractors accountable for any low-quality jobs. A contractor license bonds can help with these concerns. So, if you’re wondering what a contractor’s bond is, here is everything you need to know. 

What Is a Contractor License Bond?

A license contractor bond is a type of surety bond. A surety bond is when you promise to be liable for the debt of someone else. So, a company provides an owner compensation if the contractor doesn’t complete a project. This bond protects homeowners from financial loss. 

It also assures the contractor will follow the terms and conditions of the contract. If they don’t, then the client can hold them accountable. The bond protects against job incompletion or the non-payment of materials. Keep in mind contractors must obtain a license bond to become certified. 

Who Is Involved in a Contractor License Bond?

There are three main parties involved. These include the project owners, the builders, and the surety company. A surety company is usually a bank or insurance agency. When the builders submit the bond, they are agreeing to abide by the policies in the contract. They assure the owners they are financially responsible and can provide quality services. 

The contractor then buys a bond from a surety company. The organization usually runs a background check before approving the bond. They want to make sure the contractor is reliable and reduce the risk of being liable down the line. 

Another factor that influences your chance of being accepted is your credit score. You want to have a higher credit score, which will also lower your premium rate. To improve your credit score, make sure to keep up with your payments and pay off any debts. You might also need to provide financial statements or proof of industry experience. These documents can increase your credibility. 

However, if a contractor doesn’t follow the conditions, the surety and contractor are held accountable. If the contractor can’t pay, then the surety company is responsible for compensating the owner. Although, they can sue the builder for the amount paid if stated in the bonds permit. 

How to Get a Contractor License Bond 

Now that you know the answer to the question, what is a contractor’s bond, here are some steps you can follow to obtain one. 

1.  Review the Job Requirements for the Project 

Before even applying for a contractor bond, carefully review the job requirements. You want first to make sure you need one. Also, you want to ensure you have the right type of bond for your specific project. Also, keep in mind your budget since you’re expected to pay a premium. This can be up to 15% of the bond amount. However, the rate will also depend on your credit score. 

2.   Get Approved by a Surety Agent

Once you determine you need a contractor license bond, then you need to get a bid bond from a surety company. This bond guarantees the bidder will undertake the contractor for the project. It also ensures the contractor will hold up their end of the bargain. These bonds typically cost around $100-$200 for smaller projects. Although for larger ones, it is based on the total project cost and the penal lump sum. 

To get approved by the surety organization, you need to fill out an application. You can either print one out or complete it online. These ask for basic information, such as your business and bond type. Then you submit it to the company and wait for the approval. They may send you follow-up information by email or over the phone. 

3.  Ask For a Performance Bond 

After you’re awarded the contract, the next step is to get a performance bond. This type of bond helps to guarantee the contractor completes the task. You usually have to pay a premium, including interest. The overall price will depend on the cost of the bond and your credit score. 

4.   Complete the Job 

After you have secured the contractor’s bond, you can begin work on the project. During this time, make sure to stay within the guidelines of the agreement. To help with this, consider creating a construction punch list to stay organized. This consists of writing down tasks that have not been completed or need to be fixed.  

5. Get Maintenance Bond

This may not be required, but you want to double-check. This protects the owner against any issues discovered after the project is finished.  Before receiving this type of bond, the company will run a credit check. So, this is why it’s a good idea to check your credit report continually.

Different Types of Contractor License Bonds 

Along with asking what a license contractor bond is, you may also be curious if there are multiple types. Here are some of the different types you may encounter. 

1.  Bid Bond 

This type of bond is one of the first steps before starting a project. It protects the owner in a construction bidding process from financial losses. The builder agrees to pay the project manager the amount decided on within the document. If they fail to do this, the owner is then compensated. An insurance agency usually offers these types of bonds. This way, the owner can trust the contractor is financially stable. 

It also prevents contractors from submitting low bids just to win the contract. The builder estimates the project expenses. They then present it to the owner during the bidding process. Once their contract is selected, they can’t go back on the terms. However, if they try to raise the price, the surety company compensates the project manager for lost costs. Also, federal projects will require this type of bond.

2. Performance Bond

A performance bond protects a homeowner from uncompleted projects. It also ensures the contractor will do the task based on the guidelines laid out within the contract. So, the bond also protects homeowners from financial losses due to low-quality work.  These bonds are sometimes part of commodity contracts. Commodity contracts ensure the buyer the product is delivered. So, this prevents homeowners from having to pay for missing supplies. 

3. Payment Bond 

This type of bond ensures all parties involved in the construction process are paid. This often includes subcontractors, suppliers, and workers. You often purchase a payment bond at the same time as a performance one. The bonds cost varies but usually depends on a few factors, such as the size of the job. 

Here are some other factors influencing pricing:

  • The amount of bonding coverage required
  • Your work record
  • Your credit score
  • Other financial credentials

4. Maintenance Bond

A maintenance bond protects homeowners against any damage after the project is finished. For example, clients could file a claim if the framework is not up to quality standards. However, this type of bond is only active for a certain amount of time. Also, a maintenance bond can protect owners against inadequate workmanship that could lead to financial losses.  

What Are the Benefits of Getting a Contractors License Bond?

A handyman should secure this type of bond since it increases their credibility. This is because it shows clients they’re trustworthy and backed by an insurance company. Homeowners also feel safer hiring them knowing they’ve agreed to the terms in the contract. This increased credibility can help contractors get more business. Also, with a license, the builder can take higher-paying jobs and work on their own time. 

Everything You Need to Know About a Contractors Bond

When it comes to construction projects, sometimes things don’t always go as planned. So many jobs require builders to get a contractor license bond. This helps reassure the client that the project will be completed on time and of the highest quality. Now that you know the answer to the question, what is a contractor’s bond, consider if you need one for your next project. 

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