Contractor License Bonds
Contractors are an integral part of the American economy. There are approximately 680,000 contractors nationwide employing as many as 7 million people and completing upwards of $1 trillion in projects annually. If you want to join this lucrative industry, first you need to learn about surety bonds for contractor's licenses.
What is a Contractor's License Bond?
A Contractor License Bond is a surety bond that is sometimes required by state, county, city and other governing agencies. The bond is typically a requirement for individuals seeking to become a licensed contractor. Contractor License Bond amounts vary from state to state. The bond amounts typically range from $1,000 up to $50,000 although higher bond amounts are required sometimes.
What does a Contractor License Bond do?
Surety bonds for Contractor's Licenses, when put in place, serve to protect the public. The surety bond provides a form of guarantee that the contractor will conduct business in a manner adherent to the laws and rules of the governing body requiring the bond. If a contractor violates these laws/rules, a claim can be made against the bond. The Surety, the entity that provides the guarantee behind the bond, will now have to either pay a sum, up to the bond amount, to cover the claim or make arrangements to settle the claim in some other fashion.
When the Surety has to pay out on a surety bond claim, the financial sum required to fulfill the Surety's responsibility on the bond is now owed the Surety by the contractor. The contractor is ultimately financially responsible for any amount paid out on a claim by the Surety.
Who Needs to Get a Contractor License Bond?
It all depends on where you work. Every state has different requirements, and counties, cities, and municipalities may have individual requirements of their own. Whether you need a license (and therefore a bond) may depend on how much the project costs, where the labor is being performed, how many people are employed on the job, or what kind of trades are involved. If you have questions about whether a bond or license is required, contact the relevant local and state agencies. Alternatively, you can contact Viking Bond Service for help understanding the bond requirements in all 50 states.
Who Are the Parties in a Contractor License Surety Bond?
Every surety bond agreement involves three distinct parties:
- Obligee – Whatever state agency creates the bond requirement and sets the bond limit is considered the obligee. Typically, this is the same agency responsible for granting contractor licenses.
- Principal – Whoever is responsible for obtaining and maintaining the surety bond is considered the principal. As the contractor, you are the principal in the agreement.
- Surety – Whatever company issues the bond is considered the surety. Viking Bond Service is qualified to issue contractor bonds in any state where they are required.
Why is a Contractor License Bond Important?
From the obligee's perspective, requiring a contractor license bond creates a powerful incentive for contractors to follow state rules and codes of conduct. By holding contractors financially responsible for mistakes and malfeasance, this type of surety bond discourages behavior that puts the people's health, safety, and finances at risk.
From the principal's perspective, a contractor license bond is important because it demonstrates a contractor's willingness to hold themselves accountable. Like other kinds of surety bonds, this one builds a bond of trust between contractors and the people who want to hire them. Contractors often emphasize the fact that they have a bond in their marketing materials for the specific reason that it helps them attract more business and look more professional.
Is a Contractor 's License Bond the Same as Insurance?
Surety bonds and insurance contracts are different in several important ways. First, surety bonds exist to protect consumers, not contractors. Bonds are essentially a line of credit that guarantees the principal (you) will pay anything owed to the obligee (the state agency). Typically, contractors are also required to carry both insurance and a bond – one is not a substitute for the other. The final difference relates to financial responsibility. Claims made against insurance help contractors recoup their losses, whereas claims made against a bond must be paid by the contractor.
How Are Claims Handled for a Contractor License Surety Bond?
When the obligee files a claim, the surety does not pay outright. First, it conducts a comprehensive investigation to determine whether the details of the claim have merit. As long as they do, the surety pays the claim in full without any further delay. However, that doesn't settle the principal's debt - it simply transfers the debt from the obligee to the surety. After paying, the surety will use whatever legal recourse necessary to collect the full amount of the claim from the principal, along with interest and fees for expenses such as the cost of the investigation. In all cases, it costs the principal less to settle a disagreement with the obligee than allowing it to lead to a claim against the contractor license surety bond.
How much does a Contractor License Bond cost?
Rates for Contractor License Bonds vary widely. The rates are determined based on various factors which include credit standing and may include financial standing as well. Typically, the poorer the credit, the higher the quotes are for Contractor License Bonds.
The best way to get a truly accurate quote for a bond is to apply for the bond and let the underwriter review the request and put a quote together. will always attempt to get the best rate for any surety bond request. In instances where the rate is high to start due to challenged credit, our renewal department can remarket the bond if there has been an improvement in credit and/or financial standing.
Another factor considered when determining the cost of a bond is the prior claims history of the contractor. Having claims on prior bonds makes getting new bonds more expensive because the surety will perceive the contractor as a higher risk. If the prior claims remained unpaid, meaning the surety took a loss, getting a surety bond that the obligee will approve becomes nearly impossible. The best way for contractors to keep their bonding costs low is to avoid bond claims period.
When Does a Contractor's License Surety Bond Need to Be Renewed?
Most bonds are active for one year, after which they must be renewed. Failure to renew can mean the loss of your contractor's license, which would effectively render your business illegal, so this step is crucial. Renewing a bond typically involves paying the premium again. As we noted earlier, your credit is reevaluated when you renew, which could potentially lower your premiums if your credit standing has improved. Since bond renewals are an annual cost, contractors should factor bonds into their operating budget. It's also important to be aware that bond renewals may not happen on the same schedule as licensing renewals. This can cause some administrative confusion, but Viking Bond Service makes things easy on contractors. Notifications to renew are sent out early and often so that deadlines aren't overlooked.
When Should You Apply for a Contractor's License Bond?
Generally, you can't work as a contractor without a license, and you can't get a license without the required bond. Therefore, you can't work legally until you can prove you have a bond. Once you know this requirement exists, apply for a quote as soon as you can. When you apply with Viking Bond Service you will receive a quote within 24 hours. After you fulfill the bond requirement, you're one important step closer to obtaining a contractor's license.
What is needed to apply for a Contractor License Bond?
- Specific Bond form – A bond form is the actual document that contains the wording of the bond. In many cases the governing agency will require use of their specifically worded bond forms. Oftentimes, we will already have a copy of these bond forms on file.
- Bond Amount – The governing agency will specify the bond amount. This information needs to be passed to the Surety to get a quote. The required surety bond amounts are usually standardized within specific governing bodies.
- Obligee name - This is the name of the governing agency requiring the bond of you.
How to Get Started with Your Contractor License Bond request:
- Contact us to go over your bond request. Our agents will be able to tell you exactly what may be required to get a good quote for your specific bond request.
- Complete an application and send any required documentation. A financial statement is not always needed but may be required along with the application. An agent will let you know if a financial statement will benefit the quote.
- Once the application is received, an agent will work to get the best quote for the request. Typically the quote will be obtained the same day to 24 hours.
- Once the quotes are received, the most favorable quote will be relayed. All quotes are FREE with No Obligation.
- The last step is to simply pay the premium and receive your surety bond.
Request a Contractor License Bond Quote:
Request a quote by either calling us at 1-(888) 2-SURETY (1-888 278-7389) or by submitting an Online Application. You can also choose to fill out the contact form on the page with your questions and requests, and one of our helpful agents will contact you shortly.
Need a Bond? Here's how to get one. Read here for information about the bonding process.
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Frequently Asked Questions About Contractor Licensing Bonds
According to The Associated General Contractors of America there are 680,000 contractors in America who run their own business. Though each one is unique, all of them have one thing in common — they're required to have a contractor's licence bond. Get answers to your most important bond questions with this FAQ.
