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Contractor License Bonds
What is a contractor bond?
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:
- The principal, who is the construction professional.
- The obligee, which is the federal, state, county or local government requiring the bond.
- The surety, which is the company issuing the bond.
In general, here's how a construction bond of this type works:
- If a contractor (or principal) violates the terms of their contractor license bond, the obligee makes a claim against the contractor.
- If damages are awarded, the contractor is then required to reimburse the surety for any money it distributed to settle the claim.
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.
Why do I need a contractor license 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.
How much does a contractor license bond cost?
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%.
| State | Bond Amount | Cost* (Annual Premium) |
|---|---|---|
| Alaska | $5,000 | $100 |
| Alabama | Varies | Varies* |
| Arizona | Varies | $100 - $1,000* |
| California | $15,000 | $70 - $1,500* |