Contractor Bonding 101: A Complete Guide for New Contractors
December 18, 20248 min readBy Can Do Surety Bonds
Starting a construction business means understanding surety bonds. This guide covers the basics every new contractor needs to know about bonding.
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Request a quoteWhy Do Contractors Need Bonds?
Surety bonds protect project owners from contractor default. They guarantee:
- You'll complete the project as specified (performance bond)
- You'll pay subcontractors and suppliers (payment bond)
- You'll honor your bid price (bid bond)
Many public projects require bonds by law. Private owners increasingly require them too.
The Three Types of Contract Bonds
1. Bid Bonds
Guarantee you'll enter the contract if awarded and provide performance/payment bonds. Usually 5-10% of your bid. Often free or low-cost with an established bonding relationship.
Guarantee you'll enter the contract if awarded and provide performance/payment bonds. Usually 5-10% of your bid. Often free or low-cost with an established bonding relationship.
2. Performance Bonds
Guarantee you'll complete the project according to contract terms. Typically 100% of contract value. If you default, the surety can complete the project or pay the owner.
Guarantee you'll complete the project according to contract terms. Typically 100% of contract value. If you default, the surety can complete the project or pay the owner.
3. Payment Bonds
Guarantee you'll pay all subcontractors, suppliers, and laborers. Protects the owner from mechanic's liens. Usually paired with performance bonds.
Guarantee you'll pay all subcontractors, suppliers, and laborers. Protects the owner from mechanic's liens. Usually paired with performance bonds.
What is Bonding Capacity?
Bonding capacity is the maximum amount of bonded work you can handle at one time. Sureties determine your capacity based on:
- Your experience and track record
- Financial strength (working capital, net worth)
- Credit history
- Current workload
- Size and complexity of projects
New contractors typically start with $250,000 - $500,000 in capacity and grow as they complete successful projects.
How to Get Bonded as a New Contractor
Step 1: Get Your Finances in Order
- Prepare reviewed or audited financial statements
- Maintain strong working capital
- Keep personal credit score above 650
- Separate business and personal finances
Step 2: Build Your Resume
- Document your experience (even as an employee)
- Gather references from previous employers/clients
- List completed projects with details
Step 3: Apply for Bonding
- Work with a surety bond agency experienced with contractors
- Complete the surety's application
- Provide financial statements and work history
- Sign indemnity agreement
Step 4: Start Small and Build
- Take on smaller bonded projects first
- Complete them successfully and on time
- Your capacity will grow with your track record
Tips for New Contractors
Build Relationships: Find an agent who specializes in construction bonds. They'll advocate for you with sureties.
Maintain Financial Discipline: Keep overhead low, invoice promptly, manage cash flow carefully.
Don't Overbid: Taking on too much too fast is the #1 cause of contractor failure.
Communicate: If problems arise on a project, tell your surety early. They may be able to help.
Keep Good Records: Document everything - it helps with bonding and claims.
Common New Contractor Questions
Q: Can I get bonded with no experience?
A: Yes, if you have experience as an employee doing similar work. Personal guarantees may be required.
A: Yes, if you have experience as an employee doing similar work. Personal guarantees may be required.
Q: What credit score do I need?
A: 650+ is ideal, but options exist for lower scores at higher rates.
A: 650+ is ideal, but options exist for lower scores at higher rates.
Q: How long does it take to get bonded?
A: Smaller bonds may be issued the same day after requirements, eligibility, and underwriting are confirmed. Larger contract bonds may take 3-10 business days.
A: Smaller bonds may be issued the same day after requirements, eligibility, and underwriting are confirmed. Larger contract bonds may take 3-10 business days.
Ready to get bonded? Call Can Do Surety Bonds at (609) 491-7404. We help new contractors get started with competitive rates and personalized service.