Difference between licensed, bonded, and insured contractors
Do you need to be licensed/bonded?
Cost of a contractor license bond
Benefits of having a licensed, bonded contractor
After years of saving, you're finally starting your dream home project. The varnished wood floors and marble countertops look perfect, but then you notice a leaky sink and moldy shower. What now?
Hiring a bonded contractor is crucial. Why? An unlicensed contractor might do a quick fix without proper permits, hiding issues and leaving you liable for injuries, jeopardizing your financial stability.
To avoid these issues, hire a bonded contractor who is qualified. This article will explain what a bonded contractor is, the importance of contractor license bonds, and how to get indeed. We’ll also cover state licensing requirements and the costs associated with obtaining a contractor bond.
In the simplest terms, a bond is a form of insurance that protects against loss of financial stability that can result from an individual or business (or the principal) failing to fulfill a promise or obligation to the project owner, the obligee. If the principal fails to meet their obligations, the bond can be used to compensate the obligee for this oversight or failure. In the context of the construction industry, a bond is a financial guarantee that protects project owners and ensures that contractors will fulfill their contractual obligations.
A performance bond is a type of contractor bond that guarantees that a bonded contractor will complete a project according to the terms and conditions of the contractor contract. This bond protects the project owner by providing financial compensation if the contractor commits fraudulent actions. These bonds are crucial in public construction projects, as well as in private projects, ensuring that the contractor maintains professional relationships and meets the required standards of contract.
A payment bond is another type of contractor bond that ensures bonded contractors will pay their teams. Subcontractors, laborers, and suppliers involved in the projects obtain protected pay under this contract. This reduces risk of financial loss if the contractor fails to make the necessary payments.
A bid bond is a financial guarantee that a contractor, upon winning a bid, will enter into a contract and provide the necessary performance and payment bonds. This bond protects project owners by ensuring that only serious and financially stable contractors submit bids. This reduces project delays and added costs.
A contractor is an individual or business entity specializing in providing specific services to clients. In the construction industry, residential contractors focus on homes and residences, while building contractors specialize in renovating commercial buildings and infrastructure like roads. Beyond construction, contractors extend their expertise to diverse fields such as landscaping, plumbing, and electrical work.
A bonded contractor is a contractor who has obtained a surety bond from a bonding company. These bonds serve as financial guarantees that ensure the contractor will fulfill their contractual obligations, protecting clients and project owners from financial losses due to fraudulent behavior.
While the terms "licensed," "bonded," and "insured" are often used interchangeably, they each denote distinct forms of protection for contractors.
A licensed contractor is an individual who has completed required training and education in order to pass specific examinations mandated by their state. This ensures they meet standard of competence in contracting work.
A bonded contractor holds a contractor bond or contractor surety bond that provides financial protection to clients if the contractor fails to meet contractual obligations. This bond assures clients of compensations for losses caused by incomplete or substandard work.
An insured contractor carries contractor insurance policies covering risks like general liability, workers’ compensations, and property damage. This safeguards both contractor and client from financial losses arising from fraudulent actions.
Licensed Contractor: Has met state-specific education and training requirements.
Bonded contractor: Possesses a contractor surety bond that provides financial protection.
Insured contractor: Carries contractor insurance policies covering general liability, workers’ compensation, and property damage.
35 of the 50 states require contractors to be bonded in order to obtain a license to operate.
In different states and for various types of contracting work, the necessity of being bonded or licensed can vary. Many states establish monetary thresholds for contractor license requirements.
In Louisiana, a contractor’s license is only required if the total project amount of a commercial project exceeds $50,000. However, this varies largely by state. Similarly, a handyman only needs to be licensed and bonded in Louisiana for home improvements or residential projects where the labor and materials cost over $7,500.
In California, all businesses or individuals who construct or alter any building, highway, road, parking facility, railroad, excavation, or other structure must be licensed by the California Contractors State License Board (CSLB) if the total cost exceeds $500. Contractors must also be licensed before submitting bids.
In Texas, while there are license requirements, there is no contractor bond requirement at all.
Because bonding requirements for contractors vary widely by state, it's essential to consult your state's contractors licensing board to determine local regulations. Suretynow is committed to supporting contractors with the familiar bonding process. If you have any questions, or require additional assistance, feel free to contact us.
The cost of a contractor license bond varies based on numerous factors such as the type of bond required, state-specific licensing requirements, and the contractor's credit score and financial stability. Surety providers issue these bonds, ensuring that contractors comply with state regulations and fulfill contractual obligations. The costs fall under a typical range of $100 to several thousand dollars annually, but this depends on the bond amount set by specific state licensing boards.
In California effective January 1, 2023, a contractor whose license is qualified by a Responsible Managing Employee (RME) or a Responsible Managing Officer (RMO) with less than 10% of the corporation’s voting stock will need to obtain both a Contractor’s Bond and a Bond of Qualifying Individual. An RME or RMO plays a crucial role in qualifying a company’s contracting license, overseeing project operations directly.
The cost of a contractor license bond depends on two numbers:
To get a contractor license bond, a contractor does not need to pay the full bond amount, but rather only the premium, which is calculated as:
Premium = Bond Amount x Premium Rate (ranges from 0.5% to 15%)
The cost of a bond varies significantly based on the state and even city in which the contractor operates.
In California, the bond amount for a general contractor is $25,000, while in Missouri, the amount is $10,000. The premiums for these bonds in California and Missouri is typically around 1%, while in Texas, where a contractor's bond is optional, it can be as high as 20%.
Here is a rough list of the bond amounts of contractor license bonds in each state:
Alaska
$5,000
Alabama
Varies
Arizona
$9,000 to $15,000, depending on type
Arkansas
Varies
California
$25,000 (as of Jan 1, 2023)
Colorado
Varies
Connecticut
$15,000
Delaware
$10,000 to $20,000
Florida
$5,000 to $20,000
Georgia
$25,000
Hawaii
$5,000+
Idaho
$2,000 to $15,000
Illinois
$5,000 to $50,000
Indiana
$5,000 to $20,000
Iowa
$5,000 to $25,000
Kansas
Varies
Kentucky
$10,000 for type A, $20,000 for type B
Louisiana
$10,000 to $25,000; price for contractors is always $100 annually
Maine
$1,000 to $1,000,000
Maryland
$20,000
Massachusetts
$5,000 to $20,000
Michigan
Varies
Minnesota
$3,000 to $25,000
Mississippi
$2,000 to $10,000
Missouri
$10,000
Montana
$3,000 to $20,000
Nebraska
Varies
Nevada
$1,000 to $500,000
New Hampshire
Varies
New Jersey
$15,000
New Mexico
$10,000
New York
$20,000
North Carolina
$2,000 to $25,000
North Dakota
$5,000 to $50,000
Ohio
$5,000 to $25,000
Oklahoma
$5,000
Oregon
$10,000 to $20,000 for residential, $20,000 to $75,000 for commercial
Pennsylvania
Varies
Rhode Island
$20,000
South Carolina
$10,000 to $15,000
South Dakota
$10,000; $20,000 for building contractors
Tennessee
$10,000 - $50,000
Texas
$25,000
Utah
$15,000 to $50,000
Vermont
$1,000 to $1,000,000
Virginia
$50,000
Washington
$6,000 or $12,000
West Virginia
Varies
Wisconsin
$25,000
Wyoming
$5,000 and $20,000
Once you have identified the specific bond required to uproot your construction project, you will need to obtain a contractor license bond. You can do so by communicating with surety providers at a variety of companies until you find the right surety bond company for your project. Some of the common types of construction bonds required would be a bid bond, performance bond, fidelity bond, and payment bond. In order to narrow down your options and ensure you are choosing the best provider of surety bonds, consult with a surety broker.
The process for acquiring a surety bond is fairly similar for every state. Here are the surety bond requirements for California:
Gather all of the required information in order to fill out an online application for a bond. You will need to provide your social security number, financial information, and credit score to the bond form. The most important aspect of this bond form is your credit score, as this determines bond cost. For more information on surety bond requirements, or bond form assistance, give SuretyNow a call, or visit: How to get a Surety Bond
After you have complied with all of the surety bond requirements, you may proceed to shop around for bonds with the best premium rate for you. The quote you receive is based on a percentage of the bond amount, known as rate. The bond amount and rate go together to determine how much your bond will cost. For example, if your bond amount is $50,000 and you obtain a rate of 5%, you will pay $2500 for your bond. If your rate is 1%, you will pay $500 for your bond. You can do this on our SuretyNow website.
After you have received a quote from a surety bond company you would like to work with, you may decide to move forward with purchasing a surety bond. The next step is to complete the purchase process. For SuretyNow, if the bond is instantly purchasable, then you will be able to checkout on our site using our secure checkout. If the bond requires manual underwriting review, we will send you a secure payment link for payment upon underwriting approval. Once your payment has been received, the surety bond will be issued.
After you have completed the purchase, you will receive your sealed bond from your surety company, which you may now print and sign. This bond certificate is necessary for California contractors when they take on a construction project. Although individuals may possess a California contractor's state license, they are still required to share their certificate, license number, and surety company name with project owners. Failure to do so, or fraudulent behavior and impersonation is illegal in numerous states, project owners may consult with the contractors state license board to verify.
Once signed and printed, you are required to submit the bond to the obligee. This will allow you to continue business operations and be a part of the verified California contractors according to the contractors state license board.
Your credit history and score is the most crucial aspect of this bonding process.
Lower premium rates: A good credit score can significantly reduce the cost of your bond premium, making it more affordable to maintain your bond.
Approval chances: Higher credit scores improve your chances of bond approval since you are considered a lower-risk applicant.
Financial responsibility: Demonstrating a mature sense of financial stability through high credit scores will enhance your credibility.
For more detailed steps, refer to our guide on how to get a surety bond.
Because of the risks associated with operating with an unlicensed and unbonded contractor, some states have strict consequences for being an unlicensed contractor or falsely posing as a licensed contractor. In California, for example, felony charges are filed against anyone who illegally uses another person's contractor license or who tries to mislead consumers into believing that they are a licensed contractor. The validity of a contractor's license may be researched through a state licensing board.
These policies are put in place because there is a large difference between using a licensed contractor versus an unlicensed one or choosing from independent contractors. The largest benefit is increased protection. A bonded contractor provides customers with an additional layer of protection in the event that the contractor fails to meet their obligations. This prevents added legal fees, financial losses, property damage, and much more harm to project owners. This is something to deeply consider for small businesses, private projects, and those searching within a pool of independent contractors.
For example, if you hired a bonded contractor to do your floors and they are done poorly, unfinished, or take far too long, you can make a claim on the bond and recuperate financial loss. This is one of the most common types of benefits to hiring a bonded contractor.
Protection: Bonds provide a financial insurance policy for project owners and contractors to ensure that all contractual obligations are met.
Credibility: Having a construction bond enhances the contractor’s credibility and trustworthiness.
Compliance: Performance bonds, for example, help ensure that contractors adhere to industry standards, federal laws, and regulations.
Hiring a bonded contractor is crucial for ensuring the financial protection and integrity of your project. Verifying if a contractor is bonded offers the peace of mind that you are working with a responsible and reliable professional. Here are some steps to embark on that verification process:
For construction professionals, obtaining a contractor surety bond, or any of the common types of contractor bonds, is crucial for obtaining licensure and credibility as a local contractor. Not only do contractor bonds ensure you have valid contractor licensing, but they reassure financial insurance to project owners, and compensation insurance to subcontractors and laborers involved with the project.
For consumers, choosing a bonded contractor can provide peace of mind knowing that you will be compensated in case of any unforeseen disputes with the contractor. This research is not only limited to public construction projects; small businesses and private project owners should research prices, bonding qualifications, contractor licensing, and certifications before hiring construction professionals. Suretynow is determined to continue helping construction professionals become bonded. For more information, contact us.
