Photo of construction workers from behind on a worksite with illustration of contractor license bond on the right

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In order to perform construction work, many states require contractors to be “licensed and bonded.” What does that mean? Well, every state sets its own rules for contractor licensing, and contractors often must purchase a surety bond in order to legally practice their trade. In this article, we’ll explain the details of contractor license bonds, including what they are, who needs them, who they protect, and the process of obtaining one. 

Learn more: The complete guide to contractor licensing state-by-state

What is a contractor license bond? 

A contractor license bond, more simply known as a contractor bond, is a type of surety bond that guarantees a contractor will operate ethically and comply with local regulations and building codes. Many states, counties, and cities require that businesses purchase a contractor bond in order to qualify for a contractor license.

A contractor bond is different from other types of construction bonds because it provides broader protection to the public and is regulated by a licensing board. For example, contract bonds — like payment or performance bonds — are project-specific bonds that protect the property owner and subcontractors. When the project is completed successfully, the bond expires. A contractor license bond, on the other hand, “follows” the contractor to every job they work on. 

A contractor bond is a three-party agreement

The three parties involved in a contractor license bond are the obligee, the principal, and the surety company.

Chart illustrating the 3 parties to a contractor bond: The obligee, the principal, and the surety.

The obligee is the governing entity that requires the surety bond in order for a contractor to be licensed. A few examples of obligees include the California Contractors State License Board, the Nevada State Contractors Board, and the Oregon Construction Contractors Board.

The principal is the contractor required to obtain the bond. In the event of a valid claim against the license bond, the principal must reimburse the surety company for any payouts. 

The surety company is a third-party entity issuing the bond. They guarantee payment to those financially harmed when things go awry because of a contractor’s failure to uphold obligations. The surety company is responsible for requesting reimbursement from the contractor after a claim payout has been made on the contractor’s behalf.

Do all contractors need a license bond?

Each state (and sometimes individual municipalities) sets its own licensing and bonding requirements, so different contractors may need a license bond in different locations. As a result, a variety of types of contractors may be required to hold a license bond, including GCs, roofers, electricians, plumbers, pool contractors, and HVAC contractors, just to name a few. 

Here are a few examples:

1. In California, all contractors must hold a contractor license bond. Two additional bonds may be required: 

  • A Bond of Qualifying Individual for when the qualifier is a responsible managing employee OR when a responsible managing member, manager, or owner has less than 10% stock ownership
  • An LLC Employee/Worker Bond when the business entity is licensed as an LLC

2. In Nevada, contractors of all trades are required to hold a bond. If working on pools and spas, a residential pool and spa license bond must be filed in addition to the contractor license bond.

3. In Oregon, contractor bond requirements are determined by whether the contractor is doing residential or commercial work (or a combination) in addition to the contractor’s trade being general, specialty, or limited. If a contractor is doing both residential and commercial work, they must hold two surety bonds. 

4. In Texas, contractor bonds are enforced at the city or county level. Some cities and counties have an all-encompassing contractor license bond while others have requirements specific to the type of work being performed, such as those performing work in a right of way or other permit work within the municipality. 

Because each state varies so significantly, it’s important to understand the city, county, and state requirements to ensure proper coverage. 

How much does a license bond cost?

The price of a contractor license bond generally ranges from 0.5%-10% of the bond amount. Sureties use a variety of factors to determine the bond price, including the contractor’s credit and financial history, number of years in business, and the bond limit. 

In Oregon, for example, the limit for a residential general contractor is $20,000, so a contractor with excellent credit and several years in business could pay around $100 (0.5%) for a one-year term. 

For the $50,000 Oregon commercial specialty level 1 license, bond rates start at around $250 for one year. However, surety companies evaluate each state’s requirements individually so rates for similar limits in other states may be different should there be a greater risk present.

What does a contractor license bond cover?

Although contractors are the ones mandated to obtain this coverage, they are not the ones protected (that’s what general liability insurance is for). Instead, a contractor bond protects the public, employees, subcontractors, suppliers, and the obligee.

A contractor’s failure to uphold contractual duties and comply with regulations could result in a bond claim to recover damages. 

Clients can file a claim for:

  • Unfinished work or complete project abandonment
  • Damage to property 
  • Deviation from contract specifications 
  • Excessive progress payments 

Subcontractors, suppliers, and other vendors can file a claim for:

  • Failing or refusing to pay wages/dues in a timely manner

Obligees can file a claim for: 

  • Failing to pay licensing or other fees

Note: These scenarios don’t always lead to a claim. Sometimes the licensing board suspends the contractor’s license or takes some other disciplinary action as a first step. Before a claim is pursued, the obligee often gives the contractor a chance to rectify the situation or the surety company encourages the contractor to work things out with the claimant. 

Contractor bond claim process

The contractor bond claim process is pretty straightforward. A bond claim can be filed by anyone who has been financially harmed by the obligee, e.g. the clients, the subcontractors, and the obligee. 

Depending on the state, the claim may be made to the obligee or directly to the surety company. If a subcontractor, employee, supplier, or client files a claim with the obligee, the obligee may do their own investigation prior to requesting a payout from the surety company. However, if the obligee deems it legitimate, they will notify the surety. 

Once a claim reaches the surety company, whether directly from the client/subcontractor or from the obligee, a claim handler reviews the details and begins an investigation to confirm the claim’s validity. 

If justified, a payout is made to the claimant (person or entity pursuing the claim) up to the bond’s limit. Lastly, the principal must reimburse the surety company for the full claim amount; this is because surety bonds are unlike insurance, and claims are only paid out for intentional and fixable issues the contractor fails and/or refuses to address.

Read more: 4 steps after filing a bond claim

How to get a license bond

First, make sure you understand the city, county, or state licensing requirements. From there, find a reliable surety company and fill out a bond application. 

Surety companies use a variety of underwriting criteria, including the applicant’s personal credit score, the number of years in business, and the bond limit (maximum amount of money that the surety will guarantee payment for a claim payout). 

In some situations, a review of the contractor’s business and/or personal finances may be necessary. The underwriting process allows sureties to determine the risk associated with each applicant and their ability to pay the surety company back in the event of a claim. 

After purchasing the bond, the contractor must file their license bond with the obligee. Each obligee has different requirements, some of which include electronic filing, an emailed copy of the bond, and the original signed and sealed bond (most common).

Most contractor bonds are renewed on an annual basis, but some surety companies have multi-year terms available. Knowing the bond renewal date helps with compliance and ensures no lapse in coverage.

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