Contractor Bonds vs. Contractor’s License

Two constractors

Before you can start a career as a contractor you will need tools, a vehicle, and a way to connect with new customers. But you may also need to get authorization from the state where you live.

To become a licensed and bonded contractor, contractors must jump through a surprising number of hoops to get their business fully compliant with all the rules. Understanding exactly what you need to do can be confusing, but it’s essential to get things right because your business depends on it. If you don’t check all the boxes that the state requires, it’s illegal for you to work as a contractor, and there are strict penalties when you get caught. 

Aptly named, the two most common requirements in this process are to get a contractor bond and a contractor license. These are two different things, but they are also related, and they serve an overlapping purpose – it’s no wonder people are confused. Just don’t let that confusion keep you from pursuing your career as a licensed and bonded contractor. We will explain everything in the following article.

What is a Licensed and Bonded Contractor

There are two ways to answer that question. In the eyes of the state, a licensed and bonded contractor is someone who meets all the core requirements to work legally. They have both a contractor bond and a contractor license, granting them the right to offer professional services to whoever will hire them. 

In the eyes of potential clients, a licensed and bonded contractor is the only kind of contractor worth hiring. These individuals have been approved by the state or local city/county government because they have a license. They also agree to take responsibility for their mistakes because they have a bond (we will get into these distinctions more later).

Moreover, a licensed and bonded contractor appears more trustworthy, credible, and accountable compared to anyone who is not licensed and bonded. That’s why contractors who operate according to all the relevant rules have more successful and sustainable businesses. 

What is a Contractor’s License?

In simple terms, a contractor’s license authorizes someone to work as a legal contractor within a specific state. Every state (and some counties/cities) creates its own rules and regulations governing the behavior of contractors.

License requirements are useful in several ways. First, they define standards that all contractors must meet before going into business, which keeps anyone who can’t meet those standards out of the industry. By being able to earn a license, all licensed contractors meet minimum standards for solvency, transparency, and accountability. 

Secondly, license requirements give the state a mechanism to remove problematic contractors from the industry. If a contractor cheats customers, cuts corners, or puts public trust and human lives at risk, the state can revoke their license, then issue harsher penalties if they continue working. 

Are There Different Types of Contractor’s Licenses?

Licensing requirements vary widely between states. In some cases, the type of license you need depends on the trade you practice, such as plumbing, electrical work, or general contracting. In other cases, the scale of the business determines licensing requirements. For instance, contractors that work on major building projects often need a different license than contractors who complete home improvement projects. 

Since it’s imperative to meet all necessary licensing requirements, you need to know exactly what they are. Contacting the state agency that regulates your contractor type will always be the most accurate source of current information, but you can also talk to other contractors, recruiters, or professional organizations. 

All states have individual requirements to obtain a license, some more difficult than others. Here are some common examples:

  • Be at least 18 or 21 years of age (depending on state).
  • Fill out a contractor’s license application, along with other required forms.
  • Have a specified amount of verifiable experience and references.
  • Have a high school diploma or GED.
  • Obtain a contractor bond.
  • Pass a criminal background check.
  • Have the necessary insurance coverage.
  • Pass various tests about business requirements, worker safety, or building codes.

What is a Contractor Bond?

A contractor bond is a type of surety bond that holds a contractor financially liable for misconduct that causes damages to clients or the public at large. There are three parties involved:

  • Principal The contractor who gets the surety bond and becomes responsible for paying all valid claims filed against it. 
  • Obligee –The person or company that hires the principal for contracting work. If damages occur, the obligee may file a claim against the surety bond seeking equivalent compensation.
  • Surety The company that backs the contractor bond. If the principal can’t or won’t pay for a claim, the surety guarantees payment to the obligee. The principal must then pay the surety back the full payment amount plus interest and fees. 

A contractor bond creates a financial incentive for contractors to follow all state rules and regulations because they have to pay out of pocket when they don’t. This bond also helps anyone hurt by an unlawful contractor to resolve the situation by guaranteeing them a paid settlement equivalent to the damages. 

How to Get a Contractor Bond

Obtaining a bond is often the first step for how to become a licensed and bonded contractor. Here’s what to do:

  • Find a surety agency that issues contractor bonds (also called contractor license bonds) in your state.
  • Complete a bond application.
  • Submit to a credit check.
  • Provide a copy of the bond requirements.
  • Supply any documents or paperwork.

The surety agency will use this information to quote a price for the bond premium – usually a small percentage of the bond size that can be higher or lower depending on credit. After paying the premium to activate the bond, the surety supplies documents proving you have met the contractor bond requirement. 

What’s the Difference Between Licensed and Bonded?

By now you know about contractor bonds and contractor’s licenses. What’s the difference? Primarily the fact that obtaining a bond is a requirement to get a license. You must prove you have a contractor bond before you can get a contractor’s license. And if your bond coverage lapses for any reason, your license becomes invalid as well (state rules vary).

Bonds are a near-universal license requirement because they signal that a contractor is willing to be held accountable when they break the law. Even though a license and a bond are different things, they work in close conjunction. By that, we mean that a contractor wouldn’t need to get a bond if they didn’t also need a license. In addition, if they couldn’t get a bond, they couldn’t get a license either. This explains why you only hear about licensed and bonded contractors and not one or the other.

Viking Bond Service For Contractor Bonds Nationwide

If you’re looking to become a licensed and bonded contractor, get a quote in less than 24 hours from Viking Bond Service. We are also happy to answer any questions you have – call us at 1-888-2-SURETY (1-888-278-7389) or contact us anytime.