Contractor License and Bond – All You Need To Know

Contractor License and Bond – All You Need To Know

How Does Bonded Work?

In this case, bonded signifies that the contractor has obtained a surety bond that will act as an assurance and an agreement lien to the owner and other stakeholders. A surety bond is an agreement that is formed by three parties, namely the contractor, which is the principal, the project owner, which is the obligee and the surety company, the guarantor.
In case the contractor does not adequately perform the contract, the obligee will be entitled to claim the bond. The surety company then looks into the claim put forward by the obligee, and if it is genuine, the obligee is paid up to the face value of the bond. Before paying the claimant, the surety company has to recover the amount from the contractor contracted to make a reimbursement. This relationship affords project owners the surety of not suffering any loss from contractors, especially when the latter defaults on their obligations, fails to conform to the required standard, or produces substandard work.

What is a Bonded Cost?

A surety bond cost, called bond premium, depends on several factors. Usually, the premium is a certain percent of the total face value of the bond, often as low as 1 percent and as high as 3 percent. The exact percentage differs based on the credit score of the contractor, their history of credit repayment, and the scope as well as the nature of the works that are to be undertaken.
For instance, in the same example, let the surety demand be $100,000, and the industry’s premium rate be 2%, the cost of the bond would be $2,000. It indicates that if a contractor holds a good credit history and good financial position then he would get favorable premium rates in comparison to the contractor who possesses bad credit history. The premium is being paid in full every year as well, so long as the bond is needed for the project.

Why Do People Use Bonds?

Bonds are used in construction for several key reasons:

Financial Protection
While bonds guarantee that the contractor performs as agreed, they create a financial backup for the project owners in case of a default. This protection can apply to any general project situation, including project delays and poor workmanship.

Risk Mitigation
In construction, risks are a component part of any construction practice area and cover financial risks and operational and legal risks. Bonds, on the other hand, assure that contractors will execute their agreed-upon responsibilities and that little risk of project disruption or delay can be expected.

Regulatory Compliance
Several countries demand that contractors be bonded so that they can reasonably be issued with a license and legally offer their services. This requirement remains as a check to ensure contractors are up to expectations with set policies to create a consciousness of quality in construction companies.

Trust and Credibility
A contractor who is bonded is more credible than one who is not bonded because the bonding company is responsible for any unpaid work by the contractor and any other employee related to the job. The project developers are in a better position to hire bonded contractors simply because they are assured that the contractors have a line of credit standing in case they fail to deliver as required. This trust could result in heightened business prospects and a superior position in the industrial marketplace.

Why Do People Use Bonds?

Frequently Asked Questions

Q1. Why pay more for a bond?
Paying more for a bond not only ensures proper coverage but also helps you make sure that there is a lower risk of surety, as this will benefit both project owners and contractors.

Q2. Do bonds have fees?
Yes, bonds have fees which are known as premiums. They are paid annually, as they cover administrative and risk assessment costs.


As a contractor license and bond are required essentials, you can always approach professionals to help you. For more professional advice and details, you can connect today at Can Do Surety Bonds.