What is Contractor Bond and Why Should You Care?

Last updated on April 29, 2021

Dealing with contractors, you may come upon the term contractor bond. Let’s discuss what it is and how it can affect you. Read on!

Contractors are required to post a bond with the state before they can start work. A contractor bond is a form of insurance that protects the public from contractors who don’t finish their projects or don’t pay subcontractors. A contractor’s bond is typically equal to 10% of the contract price, but it can be more or less depending on the type of project and other factors.

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What Are Contractor Bonds?

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According to Bonds Express, a contractor’s license bond is more correctly described as a line of credit than insurance. With this requirement, a contractor must purchase a premium to make sure the bonding company agrees to the terms. This bond is an agreement among the contractor, the state licensing agency, and surety. If a contractor violates coverage for certain laws and regulations and cannot pay back what they owe, the licensing board can file a claim against their bond.

A contractor bond is a contract that binds together three different parties. If a contractor fails to fulfill the terms of the bond, the obligee can make a claim and receive compensation for any damages. Moreover, unlike an undertaker for traditional insurance policies, surety underwriters assume there will be no loss.

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Workers Compensation and Liability Insurance Policies

There must be cases where people get hurt on the job or incur injuries in work-related travel, including fatal injuries. There are policies to protect those who get injured or die at their workplace, including injury due to workplace violence, natural disasters, illness, and death. There is coverage that protects against the financial disruptions caused by an injury that leads to time off work.

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Contractor License Bonds

Licensed contractors owe a type of recognizable fiduciary duty to all of their clients to not engage in reckless or grossly negligent business behavior. Contractors promise faithful and diligent service.

The use of contractor license bonds is generally set by several local municipalities, counties, states, or the federal government. It is required as a condition for allowing various types of construction business contractors to operate legally. Bonds are secured through a contract with a surety company that agrees to pay the sum if the contractor commits fraud or fails to fulfill his or her obligations while working on jobs.

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Contractor Bonds by State

Contractors are required at the state, county, or local level to become licensed if they want to get a contractor’s license. These costs and requirements will depend on where you are planning on doing construction. Select your state below for more specific information about contractor bonds in your area.

DFFL is the only organization in the US that lets contractors and their clients create a Supplier Relationship for performing services. The organization also provides working capital credit lines to their suppliers to ensure cash flow can be uninterrupted.

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Who is Protected by a Contractor Bond?

The misunderstanding of contractor license bonds is that they protect the contractor from being liable for damages. The bond company may issue a claim and get paid without the bond company needing to find any evidence against the contractor, which differs from insurance policies because cases against contractors are usually found for traditional insurance policies.

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What is a Bonded Contractor?

You may have heard of “bonded contractors.” Don’t confuse this with a bond! A bond is when the construction site is responsible for what happens on-site. Once you are bonded, you are legally liable for damage done to occupants in areas out of the construction area.

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What Does It Mean to Be Bonded?

Bonded contract workers are those who either possess a surety bond or fidelity bond. A surety bond is typically an indenture of good faith and undertaking by and for a third party (surety) obligating them to see that an obligation is fulfilled when the original contracting party defaults. State or local governments typically require contractor license surety bonds in order to attain a license, so we will start with those.

When people become licensed contractors, they have to get a contractor license bond. This allows the public to know that the builder will finish projects with integrity and worth. Suppose they do not complete the project, the bond pays for this and corrects their mistake. The bond varies by the agency requiring it, such as various ball-park requirements that differ for each company depending on what they are looking for in a process.

Bonded contractors may be required to obtain a performance bond, license bond, or subcontractor’s security. When they are, these bonds protect different parties from different occurrences specific to work needed doing. Surety bonds protect against allegations of fraud, while fidelity bonds insure against thefts and forgery enacted by the contractor’s employees.

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