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All About Contractor License Bonds

Contractor Bonding

Construction contractors require being either licensed or registered with their local authorities or state. This process often needs a contractor license bond. A contractor license bond can be described as a kind of surety bond, i.e., an agreement between 3 parties: surety (the bond provider), the obligee (this is the entity that needs bond such as a state) and the principal who is the contractor. A contractor license bond acts as a form of guarantee that the contractor will comply with every regulation that is imposed by the respective local authority. It is concerned with the general compliance with statutes of a license. In other words, it is a surety line of credit for business. It provides additional protection for your clients that you will diligently fulfill your work.


Before a surety issues a contractor with a license bond, through scrutiny is conducted on your business and financials to ascertain that you can successfully fulfill your obligations.

This means that if a contractor fails to comply with the regulations resulting in damage to any party covered by the bond, then a claim can be legally filed. If the contractor’s actions are determined to e unlawful, the surety covers the immediate costs but up to the penal sum of the license bond. It should be noted that the contractor will be required to reimburse the money soon after by the indemnity agreement which, constitutes the bonding process.

Contractor bond cost

The cost of contractor license bond is normally in the range of 0.75%-2.5% of the entire amount. However, the percentage amount is a factor of business and personal status, i.e., business experience, financial statements and credit score. Construction contractors with excellent overall conditions pay less compared to those bad credit.

Also, each local authority and state has varying requirements about the bond amount.

How to decrease contractor bonding cost

There are some effective techniques for reducing the contractor bond cost; these include the following:

Credit score – The credit score ought to be high for one to pay low amounts.

Overall financial status – It is good and advisable to showcase good liquidity and strong financial statements.

Provider – Select a good surety bond provider.

Who requires it

A contractor license bond may be required from Home improvement contractors, Carpenters, Roofers, Electricians, Plumbers, HVAC contractors and General Contractors.


Contractors who have breached the agreement of the contractor bond can face a claim as earlier mentioned. This may be due to non-compliance with local regulations or state regulations, failure to declare taxes and pay them, use of fraudulent business methods, etc.

It should be noted that bond language, as well as forms, vary depending on location. If a claim is made, there are several actions that can be sought such as out-of-court settlement and it is the most highly recommended. Alternatively, the matter can be taken to court for settlement.

Unfortunately, if the court case is lost, then you will be forced to compensate the claimant financially up to the whole penal sum of the bond.

The above insightful information outlines in detail all about contractor license bonds, knowledge of such is important for those in the business as ignorance is no excuse.…