Contractor License Bonds are required by many States, and Municipalities. Learn more about these License Bonds, and how to easily obtain them.
What is a Contractor License Bond?
Contractor License Bonds are a type of surety bond that usually guarantees that a contractor will honor codes and laws for the jurisdiction in which they are licensed.
In some jurisdictions, Contractor License Bonds may also guarantee the payment of taxes, subcontractors, and suppliers.
Contractor License Bonds are Usually Required for Licensing
Contractor License Bonds are generally a condition of obtaining and maintaining a license in many states and municipalities. Failing to carry these bonds can often result in contractors having their license suspended. Some jurisdictions also Subject contractors to fines and criminal charges for operating without a valid Contractor License Bond.
How Do Contractor License Bonds Work?
The Contractor on a License Bond is referred to as the Principal. The Contractor provides information, payment (bond premium) and indemnity to a Surety Bond Company (Surety). In return for the Premium and Indemnity, the Surety provides a guarantee to a State or Municipality (The Obligee) that the contractor will follow the local codes and laws of contractors in that jurisdiction. If the contractor fails to do so, the State, Municipality, or consumer can file a claim against the Contractor License Bond. If the claim is found to be valid, the Surety will pay the claim and seek to be reimbursed by the Contractor under the Indemnity Agreement.
How Are Contractor License Bonds Obtained?
Getting a Contractor License Bond generally depends on the amount of the bond required. Bonds of $250,000 and less can usually be purchased instantly with a simple credit check. Smaller Bonds may not even require a credit check and are referred as “Instant Issue”.
Very few Contractor License Bonds exceed their amount. Those that do may require the contractor to provide a financial statement.
Can Contractors Obtain License Bonds with Bad Credit?
Generally, yes. Even with bad credit or bankruptcies, most contractors can obtain license bonds. Contractors may have to provide additional information and background on their credit history, but these bonds are still obtainable for most. Contractors with credit blemishes should expect to pay a higher cost for these bonds.
Can New Contractors Obtain License Bonds?
Yes. In fact, some surety bond companies have programs specifically for new contractors in some jurisdictions. For example, a program exists specifically for new contractors needing a California Contractor License Bond. These programs make it more affordable and easier for new contractors to obtain License Bonds.
What Do Contractor License Bonds Cost?
Contractor License Bonds are inexpensive. These bonds can generally be purchased for 1% or less of the bond amount annually. Many Surety Bond companies also provide significant discounts if a contractor purchases multiple years in advance. These discounts can be between 10% – 40% depending on the bond company.
Did you Know – Facts about License Bonds
1. A contractor license bond is a type of surety bond required by many states in order to obtain a contractor’s license.
2. The bond guarantees that the contractor will comply with all applicable laws, regulations, and ordinances.
3. The bond is usually issued by an insurance company or a surety bond company.
4. The bond amount is typically set by the state and can range from $5,000 to $50,000.
5. The bond is typically valid for one year and must be renewed annually.
6. The bond premium is typically a percentage of the bond amount and can range from 1-15%.
7. Contractor license bonds are required in most states for contractors who perform work in the construction, electrical, plumbing, and HVAC industries.
8. Contractors are responsible for any claims made against their bond.
Contractor License Bonds Are Not Insurance
All contractors should understand that License Bonds are not insurance. This can be confusing as they are often sold by insurance agents and brokers. Contractor License Bonds are written by surety bond companies on the Principle of Indemnity. This means that if the bond company suffers a loss, they will seek to be reimbursed by the contractor. Usually this gives the bond company access to both the contractor’s corporate and personal assets. This makes these license bonds more like a credit product than insurance. More can be read about the differences between surety bonds and Insurance here.
Alternatives to Contractor License Bonds
Some States and Municipalities will allow contractors to post cash or Irrevocable Letters of Credit (ILOCs) in lieu of Contractor License Bonds. However, these products tie up a contractor’s resources that may be needed in their businesses. Contractors can read more about the differences between Surety Bonds and ILOCs or Cash.
Contractor License Bonds VS. Contract Bonds
Contractors are often confused between Contractor License Bonds and Contract Surety Bonds. Often, contractors performing commercial work may need both. Whereas Contractor License Bonds guarantee that a contractor will uphold local codes and laws, Contract Bonds guarantee contracts. Contract Bonds include Performance Bonds, Payment Bonds, Bid Bonds and Maintenance Bonds. Unlike Contractor License Bonds, each of these bonds guarantees an obligation on a particular project.
There are thousands of different contractor license bonds that are needed across many States and Municipalities. Contractors can search for their license bonds by state here. Contractor License Bonds are an important tool for protecting the public and maintaining licensing. Fortunately, these bonds are easy to obtain and inexpensive.
Some Interesting Statistics on License Bonds
The majority of states require contractors to have a license bond in order to operate legally.
The average contractor license bond amount is $12,500.
The most common type of contractor license bond is a surety bond.
The purpose of a contractor license bond is to protect consumers from any financial losses caused by a contractor’s failure to comply with state laws and regulations.
The cost of a contractor license bond is typically a small percentage of the bond amount.
Contractor license bonds are typically valid for one year.
Contractors are responsible for any claims made against their license bond.
Contractor license bonds are typically required for contractors in the construction, electrical, plumbing, and HVAC industries.
Contractor license bonds are regulated by the state and must be issued by a surety company.