What Independent Contractors Need To Know About Surety Bonds

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What Independent Contractors Need To Know About Surety Bonds

Jan 25, 2017

Want to become an independent contractor? Here's what you need to know about surety bonds.

Guest Blog Post by Todd Bryant

If you want to work on construction, repair, maintenance or other similar projects, yet remain independent, then becoming an independent contractor is the right thing for you. But to become an independent contractor in most states, you will need to get a contractor license.

Among the various licensing requirements, such as previous experience and education, there is also a contractor license bond requirement. If you're planning on becoming an independent contractor, getting acquainted with surety bonds is an important part of the process. Let’s go over it together.

What are surety bonds?
Surety bonds are agreements between three parties: the bond principal (the contractor getting the bond, for example), the bond obligee (usually the state licensing board or division) and the surety bond company which issues the bond.

These agreements are put in place to protect third parties that may suffer losses as a result of non-compliance of the contractor with relevant laws. Say that a contractor obtains a contractor license bond, which is typically required upon applying for a license. As such, it guarantees that the contractor is licensed (which provides him or her with credibility). But it also guarantees that the contractor is bound to comply with all state and federal regulations and requirements for contractors.

If the contractor violates those statutes and regulations by, for example, not doing their job or being dishonest to their clients, the latter can file a claim against the contractor license bond. By filing a claim, claimants are requesting compensation from the surety for damages or losses they have suffered. The surety then investigates the claim and, if there is cause for the claim, compensates claimants up to the full amount of the bond.

Once a claim has been filed and compensated by the surety, the contractor is required (per surety bond agreement) to repay the surety for its financial backing of the claim.

What is the bond amount and how much does a contractor license bond cost?
The bond amount is the maximum sum of compensation that can be extended under a surety bond agreement, either to one or more claimants.

Amounts for contractor license bonds are determined in each state separately and may also vary depending on the type of contractor license you are obtaining. Sometimes municipalities may have a separate or additional requirement for the amount of the contractor license bond.

For example, all contractor license bonds in California are in the amount of $15,000, while contractors in Nevada may have to obtain a bond between $1,000 and $500,000, depending on their license type.

Do not worry though - the bond amount is not the same as its cost. The cost of the bond is typically a small percentage of the full bond amount. This percentage is determined by sureties when they issue a bond to an applicant. In determining the percentage, or rate, sureties consider applicants' credit score and financial history.

The cost of a contractor license bond is not fixed once it is determined and can be changed when the bond is renewed after it expires. Things like an improvement in credit score and better financials can have a very positive effect on the surety bond rate. Normally, applicants cover between 1% and 3% of the total amount.

Things to keep in mind when obtaining a contractor license bond
When applying for your contractor license, make sure to check with your state or municipal licensing board or division what the licensing requirements are.

Things to find out about your bond are:
- What kind of bond you need for your type of license
- The amount of your bond
- The duration for which you must obtain the bond
- When you need to renew your license and bond (typically on a yearly or bi-annual basis)
- The terms and conditions of the bond that you must comply with

You should also make sure to keep in touch with your surety, should difficulties with a client arise, so that the surety can help you mediate the situation. Most sureties have great professionals on board who are familiar with the various industries that require bonds. These people are often able to help resolve instances which could otherwise result in a bond claim.

Bonds for construction projects
Contractors who work on federal or public projects will often be required to obtain additional types of bonds. These are so-called contract bonds that guarantee for the performance on the particular projects as well as for the payments to subcontractors.
They should not be confused with contractor license bonds, however, which are required in order for your license to remain in force.

Questions about contractor license bonds?
Is there anything else you'd like to know about the contractor license bond? Leave us a comment below, we'd be happy to provide you with further information or provide assistance.

Todd Bryant is the president and founder of Bryant Surety Bonds. He is a surety bonds expert with years of experience in helping business owners get bonded and start their business.
The opinions expressed in our published works are those of the author(s) and do not necessarily reflect the opinions of the National Association for the Self-Employed or its members.

Courtesy of NASE.org