A contractor’s bond is a type of surety bond that protects project owners and the public by guaranteeing that a contractor will meet their legal and contractual obligations.
It is a protection for residential or commercial customers against fraud or poor workmanship that is way below industry standards. Whereas performance bonds ensure that the contractor fulfills the terms of a contract, a contractor license bond ensures that the contractor will live up to state or local licensing requirements.
It is much more desirable for contractors to live up to the terms of any rules or regulations which apply, rather than to allow a situation to develop into a claim of unfulfilled bond terms. When that happens, an obligee would naturally seek financial restitution in lieu of unfulfilled terms, and the surety would have to pay the bond amount, as well as any legal costs involved. Ultimately, however, all those costs would then trickle down to the principal, who could suffer a major blow to their business.
It is a legal requirement in most states that the contractor gets bonded in order to operate a business within the jurisdiction of the business community where he/she will operate.
Common Types of Contractors Bond
- License & Permit Bonds: Required by state or local governments to legally operate and ensures compliance with regulations, codes, and consumer protection laws.These bonds are common in trades such as construction, electrical, plumbing, and HVAC.
- Bid Bonds: Acts as a guarantee that a contractor will honor their bid and enter into the contract if awarded and protects project owners from financial loss due to withdrawn or underpriced bids.
- Performance Bonds: Guarantees the contractor will complete the project according to contract terms, protects against default, delays, or substandard work.
- Payment Bonds: Ensures subcontractors, suppliers, and laborers are paid. It reduces the risk of liens against the project owner.
Why Contractors Bonds Are Required
Contractor’s bonds are required to protect project owners, regulators, and the public from the financial and operational risks associated with construction and trade work. By requiring a bond, licensing authorities and project stakeholders ensure that contractors will comply with applicable laws, meet contractual obligations, and conduct business ethically. If a contractor fails to perform, violates regulations, or leaves subcontractors unpaid, the bond provides a financial remedy, without shifting the burden to taxpayers or property owners. This requirement helps maintain industry standards, discourages unqualified or undercapitalized contractors, and creates a more accountable, trustworthy construction marketplace.
How Contractors Bonds Are Priced
Contractor’s bond pricing is based on the level of risk the contractor presents to the surety. Unlike traditional insurance, bond premiums are not tied to the likelihood of a covered loss but to the contractor’s ability to meet their obligations and reimburse the surety if a claim occurs. Factors such as credit history, financial stability, industry experience, and claims history all play a role in determining cost. The type and bond amount required also matter, license and permit bonds are typically low-cost with flat annual premiums, while performance and payment bonds require more detailed underwriting and are priced as a percentage of the total contract value.
Contractors Bond vs. Insurance
A contractor’s bond and contractor’s insurance serve different, but equally important, roles in protecting your business, and at NFP we help contractors understand how both fit into a comprehensive risk strategy. While contractor bonds act as a financial guarantee that you will fulfill your contractual and regulatory obligations, contractor insurance protects your business from the wide range of operational risks you face on every jobsite.
For example, NFP’s construction insurance solutions include core coverages like contractor controlled insurance programs, property, environmental liability, workers’ compensation, commercial auto, and builders risk, all designed to safeguard your equipment, workforce, and financial stability in the event of accidents, damage, or claims.
How to Get a Contractors Bond
Below is the process that contractors must go through in order to become bonded:
- Determine the type of bond needed - for working on public jobs such as municipal improvements, you would need a contract bond that covers any requirements in effect for the local area you'll be working in. This could mean that you would need a local contractor license bond in addition to a state contractor license bond. On top of that, you might conceivably be required to obtain multiple sureties as a guarantee of performance, if more than one type of work will be performed, e.g. construction work, electrical work, plumbing. It will be important to find out exactly which bonding requirements are necessary before you begin any work because local or state authorities would have the power to halt all work if licensing or bonding requirements are not met.
- Application process - this is actually considerably easier than the first step, where you have to research the specific kinds of bonds needed for legal operation on a given job and location. Once you know which bonds are necessary, you can apply online and wait to be approved by the agency you've applied with. We write all kinds of bonds including bid bonds, performance bonds, tax bonds, and more.
- Bond submission - assuming there are no hang-ups, the appropriate bonds will be delivered to you. When you receive them, you'll have to sign each bond, make a copy for your personal records, and then return the original to the appropriate government agency. In some cases, additional paperwork must be sent in as well, but this will be clearly identified in the bonding process for you.
- Receive your license - when the government agency receives your signed copy of the bond, it will then forward to you a required contractor license to operate legally within that state or local area.
Key Takeaway
Contractor’s bonds are a foundational requirement for many construction and trade businesses. They enable contractors to operate legally, win work, and build trust, while protecting owners and the public from financial harm if obligations are not met.
At NFP, this is what we do every day. We help contractors get bonded, so they can get their business rolling. We are contractor bonding professionals and we know what you need. Contact us and we will get you bonded as soon as possible.
