contractor bonding 101

Bonding for Contractors 101

If you have ever worked with a contractor before, you might have noticed they advertised that they were “bonded and insured.”

While starting your own contractor business, that phrase probably springs to mind. You likely already understand what insurance is, but you might wonder what it means to be “bonded.”

This post is going to explain exactly what a contractor’s bond is and why you need it. We will also explain the differences between contractor’s bonds and certain types of insurance, and go over the steps involved in getting your bond.

What is a Contractor’s Bond?

What does bonded mean? A contractor’s bond is a type of surety bond. It is not an insurance policy. Its purpose is to protect your client should you fail to perform your services.

Three parties are involved in a contractor’s bond:

  • The principal: This is you.
  • The obligee: This is the party requiring you have the bond (the claimant).
  • A surety: This is the company that pays the claimant if things go south.

So, for example, let’s say you are working on a contract. For whatever reason, you fail to deliver your services within the requirements of the regulations under which you are working.

The claimant, who might be a consumer or a government agency, decides to file a claim against the bond.

The surety will look into the claim, just as an insurance company would, to make a determination as to whether compensation should be granted.

If the charity decides in favor of the claimant, they will pay that compensation directly to the claimant.

Here’s the thing though—contractor’s bonds exist to provide a layer of financial protection to claimants, not to contractors.

The surety has provided swift compensation to the claimant, but you are still on the hook for the amount. You will need to pay that amount to the surety. For this reason, bonds are considered to be lines of credit.

Do You Need a Contractor Bond?

If you work as a contractor, you may need a contractor bond in order to get licensed.

Checking into the licensing requirements for your state will let you know whether one or more bonds are required.

If you perform multiple types of contracting work, you might indeed need more than one type of contractor bond.

Not only does getting bonded allow you to obtain your license and legally operate, but it also will reassure prospective clients that they are protected when working with you.

Just being able to say that you are bonded and insured has value for your marketing campaign, and can help you to convert interested parties into clients.

Do Subcontractors Need Bonds?

Now you know why prime contractors need bonds. But what if you are not a prime contractor? What if you work as a subcontractor? Do you still need to get bonded?

Often, the answer to that question is “no.” But there might be select scenarios in which you do need to get bonded.

For some projects, your general contractor might require you to get what is known as a “subcontractor performance bond.”

This type of bond is specific to the project in question. Once again, you are working with a surety company. But in this case, the obligee is not the client who commissioned the project itself, but rather the general contractor.

That way, if you fail to complete your work or you do so improperly, the general contractor can fall back on the bond.

What about the person who commissioned the project itself? They will be covered by the general contractor’s bond. They do not need protection from your subcontractor bond.

You are most likely to need to get a subcontractor bond for a project if it is your first time working with the general contractor in question.

Working with a new subcontractor is risky to a general contractor. That is why they might want that extra assurance that comes with a subcontractor bond.

If you have a well-established relationship with a general contractor, it is less likely they will ask you to get a bond. But some might still do so anyway as just part of the way that they conduct business.

Is a Contractor Bond the Same as Liability Insurance?

Contractor bonds are frequently confused with liability insurance. The difference between them is whom they are intended to protect.

As we already discussed, your contractor bond protects the consumer, not you. Liability insurance, on the other hand, is there for your protection.

If your client claims damage or injury as a result of your actions or those of your employees, they might sue you.

If you have a liability insurance policy, it will kick in to help you offset your legal costs as well as any medical or repair expenses you need to pay on the behalf of your client.

Since it is an insurance policy, you do not need to then pay the insurance company back for covering those costs the way you would have to pay back your surety if a claim were made against your bond.

Is a Contractor Bond the Same as Workers’ Compensation?

Just as people tend to mix up contractor bonds and liability insurance, they also tend to confuse contractor bonds and workers’ compensation.

If you have any employees, you will be required to purchase workers’ compensation in order to legally operate your contractor business. Workers’ comp can cover lost wages and medical expenses if a worker is injured or gets sick on the job. It is not the same thing as a contractor bond at all.

So, to sum up:

  • The contractor bond protects the client.
  • Liability insurance protects your business.
  • Workers’ comp protects your business and your employees.

What Does a Contractor License Bond Cost?

There is a pretty wide price range for contractor bonds, depending on what type of bond you require as well as your personal qualifications. We have seen costs as low as $60 a year or as high as $600+.

Wondering how you can keep your costs on the low side of this price range? One thing you can do is try to raise your credit score before you apply for your bond. The higher your score at the time of your application, the lower your cost is likely to be.

There is a lot you can do to try and raise your score quickly. A good place to start is to check your credit report for errors and correct them if you find them. You can also check into ideas like opting in to report your utilities payments to the credit bureaus.

How to Get a Contractor Bond Step-by-Step

Now you have answers to your basic questions about contractor bonds. You are ready to learn how you can get a contractor bond for your own business.

1. Find out what you need.

Bonding requirements can vary depending on your state and what type of contracting you do. The specific locales where you work can also have an impact on what types of bonds you need.

You will need to investigate bonding requirements at both the state and local level. In some cases, your state and local governments could each requires separate bonds even for the same type of contracting.

Make a list of all the different types of contracting work you do, and then check whether there are specific bonds you need for each of them.

For instance, let’s say you do both plumbing and electrical work. You might need to get a contractor bond for plumbing and a contractor bond for electrical work.

Along with requirements for specific types of bonds, your state and local governments will set requirements for the amount for each bond. Familiarize yourself with this information.

All of this research you need to do at the start of the process is arguably the most challenging part. It is extremely important to make sure you do not miss anything.

2. Gather your information.

After you figure out what types of bonds you require, you can pull together the info you are going to need for the application process.

Most of this is going to be documentation related to your finances and your work history.

3. Choose a surety.

There are numerous surety companies out there to choose from. You will notice that quite a few of them also handle insurance. You might even be able to get your insurance and bonding from the same company.

It is worth shopping around when choosing a surety company so that you can save money on your bonding (and your insurance, if the same company will provide it).

4. Apply for your bond.

Now it is time to formally apply for your bonds. You can take care of this process online quickly and easily.

5. Submit your bond.

Once you have finished applying for your contractor bonds, wait to receive them. After you do, check whether everything is correct, and then sign each of them.

You are going to be sending the originals to your state and local governments as required. That means that you should make copies of them first. Otherwise you will not be able to quickly and easily reference them or show copies of them to others in the future.

Sometimes, your government might require you to send them other documentation along with the signed bonds. Submit anything else they have stipulated.

6. Get your license.

Assuming you have now met all of your licensing requirements, all you need to do is wait for the government to send you your license. A typical turnaround time for this part of the process is about one to three weeks.

Once you have your license, you can start legally running your contractor business.

Let Potential Clients Know That You are Bonded

One last step we recommend you take is to make it as easy as possible for prospective clients to verify that your business is bonded and insured.

A good starting point is to make it part of your marketing. Use the phrase “bonded and insured” frequently in your marketing materials.

While marketing your business as bonded and insured may help to attract potential customers, most clients are going to want to see some kind of proof. This is where having copies of your bonds can come in handy.

What you can do is offer copies of your bonds to prospective clients. Along with those bond copies, provide them with the following information:

  • The web address for the appropriate lookup service provided by your regulator.
  • Contact information for the surety and the information the client might need to check the validity of your bonds.

Your prospective client can visit the regulator’s website and use the lookup service to make sure that your surety is authorized.

Once they trust the surety itself, they can contact that company directly and submit a scan of the copy of the bond that you provided them.

Alternately, the client can check the validity of the bond by providing information to the surety about the bond number, the names of the principal and obligee, the amount of the bond, the execution date, a description of the project, and the name of the relevant attorney-in-fact.

The client can either submit this information to the surety directly, or they can check with an organization like the Surety & Fidelity Association of America (SFAA).

Get Your Contractor Bond Now

Now you know exactly what it means to be bonded as a contractor. Bonding is important to meet the legal requirements for licensing and to increase trust with prospective clients.

As you are working on starting up your contractor business, you might feel daunted at the prospect of researching bond requirements and applying.

You can short cut through the process by working with a company that helps contractors become bonded. It might be possible to complete the entire process in a day.

If you are ready to get your contractor bond now so you can obtain your license and start working, click the link below.