There are several types of construction bonds, but the surety bond known as a contractor license bond is the one that's specifically required in most states to get a contractor’s license. It is a legal contract among three parties:
In general, here's how a construction bond of this type works:
Depending on the state in which you're applying for licensure, you may know this surety bond as a “general contractor's license bond" or a “home improvement contractor bond." Residential construction professionals in Texas are required to obtain a building contractor's bond.
These license bonds protect customers (not the contractor) from financial loss by guaranteeing that the contractor agrees to follow the regulations in the contractor license. Most states require this kind of general contractor bonding in order to issue the proper business license.
The price of surety bonds for construction businesses depends on both the bond amount and the applicant's credit. Bond amounts, which provide coverage to the contractor’s customers, can vary from $10,000 to more than $100,000.
Applicants with excellent credit can pay a premium as low as 1% of the total bond amount. So, if the bond amount is $10,000, the premium would be just $100 for the bond's term.
Even with an average credit score, applicants frequently receive a rate of 2% to 5% of the bond's full coverage amount. A low credit score could raise your premium to 15%.
* Cost can vary depending on the bond amount required and your credit rating
Before issuing a contractor license bond, the surety needs to evaluate your financials and business, to ensure you (as the builder) can succeed at fulfilling the obligations of the bond.
Here are a few simple steps construction professionals must take to qualify for a contractor license bond:
Contractor and builder license bonds are available through NNA Surety Bonds in the following states:
Alabama, Alaska, Arizona, Colorado, Florida, Georgia, Indiana, Mississippi, Montana, Nevada, New York, North Carolina, North Dakota, Ohio, Oregon, South Carolina, Tennessee, Texas, Utah, Washington, and Wyoming.
This type of surety bond encourages compliance with the stipulations of the contractor's license. However, if a construction professional needs a bond to guarantee performance on a specific job or individual contract, other types of construction bonds are required and must be applied for separately.