Contractor bonds are essential tools that help ensure smooth operations and the fulfillment of contracts before, during, and after construction projects. In this article, we explore these bonds in depth. Whether you’re a seasoned pro or just starting out, this guide will equip you to navigate surety with confidence.
We cover why these bonds are necessary and the types you’ll need when launching or growing your construction business. You’ll also learn how these bonds mitigate risk, foster trust, affect your finances, and ultimately, drive project success.
What is a contractor bond?
A contractor bond is a legally binding agreement between three parties: the project owner or governing agency (obligee), the contractor (principal), and the surety company (guarantor).
It’s is a financial guarantee that the contractor will fulfill the obligations outlined in their contract. This umbrella term encompasses various types of bonds, most of which belong to the following two categories:
- Contractor license bonds: Contractors often need contractor license bonds when applying to work in a new state, city, or county. The bond is required as part of the licensing process and must be renewed to continue working year after year.
- Contract (construction) bonds: Contractors also need various contract bonds to work on government/public works projects and many private-enterprise construction jobs.
Types of Contractor Bonds
As mentioned above, the two main types of contractor bonds are contract bonds and contractor license bonds. We’ll explore each category a little further.
1. Contract Bonds (Construction Bonds)
Contractors must obtain construction bonds for government or public works projects and many private-enterprise construction jobs. Here are the most common types of contract bonds:
- Bid bonds: Tell the project owner you’re serious about your bid proposal and guarantee you have the finances and ability to accept the work
- Performance bonds: Replace bid bonds after the contractor accepts a job and ensure project completion according to the contractual agreement
- Payment bonds: Offers suppliers and subcontractors financial security if their general contractor can’t pay them for work they’ve completed
- Supply bonds: Holds suppliers accountable, ensuring they provide materials and equipment as promised
- Maintenance bonds: Ensure contractors use quality workmanship
Pre-qualify for a construction bond in 2 minutes.
2. Contractor License Bonds
Prospective contractors must obtain a contractor license bond to become licensed to work in the U.S. The bond guarantees that contractors follow industry rules, regulations, and building codes and serve the public ethically and legally. Various types of contractors need this bond, including:
- Home improvement contractors
- HVAC contractors
- Plumbing contractors
- Electrical contractors
- Roofing contractors
Apply for a contractor license bond in your state.
How does a contractor bond work?
A contractor bond is a three-party agreement between:
- Principal: The contractor responsible for fulfilling an obligation to an obligee
- Obligee: The party that requires the surety bond, often the government or a project owner
- Surety: The company that issues the bond
All three parties are tied together in a legally binding contract that guarantees the contractor will fulfill their obligations. If they fail, they will face bond claims for any financial loss or damages incurred. The surety will step in to pay out the claim for the claimant when the claim is filed. Then, the surety will seek reimbursement from the contractor.
Bonds are crucial risk management tools that help protect project owners, the government, and other parties. They ensure the successful completion of construction projects and the payment of taxes and other required fees.
Who needs a contractor bond?
If you want to become a licensed contractor, your state will likely require you to obtain a contractor license bond first. Your local government may also have specific bond or permit requirements for your industry.
The Miller Act requires contractors to place performance and payment bonds on public works contracts equal to or above $100,000. Private sectors using general contractors for company operations may also require performance bonds. These bonds limit project owners’ risk and allow contractors to tackle larger projects.
How much does a contractor bond cost?
Bonds typically cost 1-4% of the total bond amount. Your surety bond rate often depends on a few factors, including your credit history, financial history, and experience.
How do I get my bond fast?
ZipBonds offers three ways to get bonded FAST.
1. Pre-Qualification
We have a feature on our website that allows contractors to pre-qualify for construction bonds in two minutes or less! You can pre-qualify for contract bonds up to $750,000 on the spot. If you need a larger bonding capacity, fill out the form, and we’ll reach out right away for more information so you can get bonded ASAP.
2. Instant Issue
We can issue bonds instantly if they don’t require a credit check. These bonds are typically lower risk. Many contractor license bonds are instantly issued.
3. Underwriting
Even if your bond requires underwriting – the ZipBonds team always strives to deliver your bond within 24 hours of application.
Other Frequently Asked Questions
What if I have a low credit score?
One of the most common questions we get is, “Can I get bonded with bad credit?” ZipBonds provides various options for applicants with low credit scores:
- Co-signor
- Funds control
- Paying a higher rate
- Providing strong business or personal references
If you have a low credit score, don’t let it stop you from applying for the bonds you need. Our blog offers information on our “Bad Credit Surety Bond Program” and expert tips for getting the lowest rates possible.
How do bond claims work?
Someone can file a claim on your bond while the bond is active, and then the surety will begin an investigation to determine if the claim is valid.
- If invalid, no further action will be taken.
- If valid, typically, the surety and the contractor will come to a solution to resolve the issue. The surety will settle the claim, and then you’ll be indebted to them until you pay them back.
Do I need to renew my bonds?
Most contractor license bonds must be renewed annually before they expire. This allows you to maintain your business license and continue working on projects in your state, city, or other municipality.
Most contract (construction) bonds don’t require renewal. They are typically active for the duration of a current project and then expire when that project is complete.
More Helpful Resources for Contractors
ZipBonds has various resources to make surety bonds easy to understand and obtain as needed. Here are some of our favorites:
- Digging into Construction Bonds: A Complete Guide
- Contractor License Bond Guides for Each StateContractor Prequalification
- ZipBonds for Agents
- Contractor Blog
Apply for a Contractor Bond with ZipBonds Today
Contact the ZipBonds team to apply for your bond today! We offer thousands of bonds, including construction, fidelity, and license and permit bonds. You can always reach us by calling (888) 435-4191 or emailing support@zipbonds.com. We’ll help you get bonded in a zip!