Contractor bonds, which are also known as contractor license bonds, are a specific type of surety bond that offers financial security to both government agencies and consumers. Each contractor license bond that's executed functions as a three-party contract that guarantees contractors will follow laws set for a specific jurisdiction. When it comes to contractor license bonds, the three parties involved include:
- the principal that purchases the contractor bond, which is the construction professional or firm providing a guarantee that licensing regulations will be fulfilled appropriately
- the obligee that requires the contractor bond, which is typically a government agency such as a state's contractor licensing board
- the surety that executes the bond, which provides a financial guarantee that the contractor will adhere to licensing regulations
Contractor bond protection
Because contractor bonds are a type of surety bond, they can be confused with insurance policies. However, contractor license bonds are not a form of insurance. Whereas insurance policies typically offer protection to contractors, surety bonds protect consumers. So if a claim is ever made against a contractor license bond, the bonded contractor will be held accountable for paying the claim. This guarantees that harmed parties have a way to collect reparation in case a contractor's actions result in financial loss.
The contractor bonding process
Before contractors can be approved to work in certain jurisdictions, government agencies often require them to purchase contractor license bonds as a show of good faith. Since contractor bonds are risk mitigation tools that function as a line of credit, the contractor bonding process is similar to other credit approval procedures. Contractors must complete an application, pass a credit check and prove they are financially stable enough to maintain contractor bonds. Sometimes surety providers also consider an applicant's work performance on past construction projects.
Contractor bond costs
The exact price contractors pay for their contractor license bonds differ for many reasons. Surety providers calculate contractor bond costs based on contractors' credit scores and other financial credentials. Contractors who have low credit scores will pay more for their contractor bonds because surety providers take a greater risk in backing financially unstable principals. Contractors with good credit should expect to pay a premium that's about 5% of the contractor bond amount whereas those with poor credit could pay up to 20% of the contractor bond amount to purchase theirs.
California contractor bonds
The Contractors State License Board (CLSB) enforces contractor license bond regulations. The CLSB requires all contractors working in the state to purchase a contractor license bond in the amount of $12,500 before they can get their contractors license. Contractors must be in compliance with all California contractor bond regulations at all times or else face penalties, which can include hefty fines and license revocation.
Texas contractor bonds
Various government agencies oversee contractor licensing in Texas depending on the type of work required for a project, e.g. electrician, plumbing, HVAC, etc. The Texas Department of Licensing and Registration oversees a number of contractor licenses at the state level, but local municipalities usually have control of more specific contractor license bond stipulations. Contractor bonds need to be filed with the agency that oversees a specific project, such as the Department of Transportation when the project relates to road construction. Out of state contractors need to get in touch with the Office of the Secretary of State to clarify which contractor bond requirements apply to them.
A number of municipalities have their own contractor bonding regulations in place, and their respective contractor bond amounts vary. For example, the city of Abilene requires Texas building contractors bonds in the amount of $25,000, as well as additional, more specific contractor bonds in different amounts. The city of Beaumont requires $15,000 building contractor bonds, as well as other specialty contractor license bonds in significantly lower amounts.
Illinois contractor bonds
The Illinois Department of Professional Regulation sets the state's contractor bonding requirements, which require contractors to provide a $10,000 contractor license bond along with their contractor license application. The Illinois State Department of Public Health requires a $20,000 plumbing contractor bond for applicable construction professionals. The city of East Moline requires a contractors code compliance bond in the amount of $10,000.
As you can see, contractor bonding regulations vary widely depending on what contractors' areas of expertise are as well as where they will be building the project. If you're a contractor who is looking to purchase a contractor bond, fill out this quick and easy form to find the exact contractor bond you need.