Being a construction contractor is all about trust and responsibility.
As a contractor, you have the responsibility for the safety and quality of the buildings in which people live, work and play. Thus, it shouldn’t be hard to see why contractors are required to obtain certain credentials before they begin operations.
One of the most important credentials for contractors is a contractor bond. These three-party contracts provide a guarantee to the contractor’s clients and state regulators that the contractor will obey the law. In most U.S. states, before you can get your contractor’s license and begin accepting contracts, you’ll first need to prove that you’ve obtained a contractor bond.
In this guide, we’ll help you understand the process required for a construction contractor to obtain a surety bond. Our first topic of discussion will be a basic understanding of what a surety bond is and why a contractor will need to obtain one.
What Is a Contractor Bond?
Contractor bonds, and surety bonds in general, are three-party contracts that create a binding financial guarantee for an obligation.
The state or local licensing agency (known in surety bond terms as the obligee) requires that the contractor (known as the principal) obtains the bond. The contractor then pays a neutral third party (known as the surety) to provide the required guarantee.
Once the bond is in force, it protects the obligee and the contractor’s clients against misconduct by the contractor. The obligee (or another injured party such as a client) can file a claim against a contractor’s surety bond if they cannot resolve a dispute with the contractor.
The bonded party will have to reimburse the surety fully for any money that the surety pays on their behalf.
Types of Contractor Surety Bonds
The most common type of contractor surety bond is known as a contractor license bond. These are the surety bonds that a contractor will usually need to obtain before they can become licensed by their state licensing board.
However, other bonds also exist for contractors, and it is important to know about them if you’re required to obtain one. These are the other types of contractor surety bonds that contractors may need to purchase:
- Bid Bonds: These bonds, which a contractor must obtain before submitting their bid package for a project, guarantee that a contractor has the resources and means to complete the project.
- Supply Bond: These bonds guarantee that a materials supplier will deliver all materials and supplies as contractually obligated.
- Performance and Payment Bond: These bonds, usually offered together in a so-called “P&P bond” package, guarantee the contractor’s performance of their duties and their payment of subcontractors.
- Maintenance Bond: These bonds guarantee that a contractor will pay for the cost of repairing any defects in workmanship or materials on a project.
Thanks to a federal law called the Miller Act, contractors who accept federal construction contracts worth over $150,000 must obtain P&P bonds, and many state governments have enacted so-called “Little Miller Acts” to similar effect. Other types of bonds may be required by project owners.
Contractor Bonds: Differences Between States
Most states require some type of surety bond as a condition of contractor licensing, but the specific requirements can vary widely. Some of the biggest differences in surety bond requirements include:
- Different bond coverage amounts depending on the estimated value of the contracts a contractor accepts.
- Different bond coverage amounts depending on the type of work the contractor performs.
- Different bond coverage amounts between states.
- Higher coverage amounts if a contractor has previously had their license suspended or other disciplinary actions were taken against them.
Remember that cities and counties may also require contractors to purchase surety bonds. It is a contractor’s responsibility to be aware of and complete all surety bond requirements.
The Process for Getting a Contractor Surety Bond
Getting a contractor surety bond is one of the most important steps in a contractor’s journey to becoming licensed. These are the basic elements of obtaining a contractor bond:
- Find a surety that writes the kind of contractor bonds that you need.
- Request a bond quote from the surety. The application will include basic information about your business and your finances.
- The surety will provide you with a bond quote based on their underwriters’ assessment of your risk level.
- You’ll have the choice of whether to pay the quoted premium or get a quote from another surety.
- The surety will send you the bond paperwork to sign, and you’ll file the bond with your contractor application.
Tips for Finding the Right Surety
Here are some important strategies for finding a surety that can meet your needs:
- Before you get a quote, make sure that the surety’s quotes are free and don’t obligate you to purchase a bond or pay a fee.
- It can be advantageous to use a surety bond broker, as brokers work with large networks of sureties and can compare their prices to find the most affordable one. However, make sure that the broker is licensed to operate in your state.
- Be aware that past credit problems, lawsuit judgments, debts, or surety claims can impact the premium you’ll pay for your surety bond. Even the simple state of being a new business can raise your premiums if your business doesn’t have well-established credit. Fortunately, specialized sureties help principals get a surety bond with bad credit or other higher-risk statuses.
- To reduce the work you have to do when submitting your application and to make sure your forms are filled out correctly, it is a good idea to work with a surety that fills out your forms for you. The best surety bond companies will send your paperwork pre-filled and ready for your signature.
Disclaimer. The views and opinions expressed here are those of the authors. They do not purport to reflect the opinions or views of IdeasPlusBusiness.com.
Any content provided by our bloggers or authors is of their opinion and is not intended to malign any organization, company, individual, or anyone or anything.
For questions and inquiries on the blog, please send an email to the Editor at ideasplusbusiness[at]gmail[dot]com. You can also follow IdeasPlusBusiness.com on Twitter here and like our page on Facebook here.
This website contains affiliate links to some products and services. We may receive a commission for purchases made through these links at no extra cost to you.
Jason brings 15 years of deep technology, product development, and marketing experience to Surety Bonds Direct. He has been leveraging Agile practices for well over a decade and is versed in various Lean practices as well. Jason has worked on substantial and complex systems dealing with secure information ranging from payroll & employee systems to e-commerce, to travel-reservation APIs. A veteran of the San Francisco/Silicon Valley technology scene, Jason now makes his home in Charleston, SC.