Surety Bond Basics- Understanding Contractor License Bonds


A surety bond is a promise by a guarantor to pay the obligee (project owner) in case the principal (contractor) fails to perform the terms and conditions on their contract. It serves as a guarantee so that the customer’s money will go to what it was intended.

Contractor License Bond is a form of insurance that protects customers from any illegal or unethical actions performed by a contractor. It is a type of surety bond that binds a contractor to do his job by abiding by the rules and regulations according to the specific contractor license.It serves as a financial recompense when the contractor fails to do his job or does something that results in a negative effect. It is basically a type of assurance that the contractor will do his job without any room for errors. It serves a purpose for three different parties which are involved.

First is the contractor, second is the company that hired the contractor, and third is the bond issuing agency. The contractor will benefit from this by improving their reputation that they are capable of finishing a job. They can also ask for financial assistance to the surety bond company which will increase the success of their project.  The customer will also benefit from the contractor license bond because there is assurance that their project will be finished without any trouble. They cannot be cheated by the contractor because of the surety company vouching for the contractors. By having a Contractor License bond the contractor is assuring the company that hired him that he will provide effective and excellent services.  If something negative happens because of the decision of the contractors then they can be charged against the bond for financial compensation which will be paid by the Surety bond company and the contractor. All three parties will benefit from this bond. Each Contractor License Bonds are different depending on the state you live in.

The contractor’s purchase the surety bond from any surety companies that are licensed in the state. The bond may be in a cash or surety bond form depending on the Contractor. The bond has no termination date until the contractors finish their contract. They may be required to pay premiums to keep their bond going. If the bond is in the form of cash the surety company will hold the money two years after the license or contract has been delivered. If there is no claimant against the bond, the contractors may apply for their bond to be released. A contractor’s License bond amount varies depending upon the volume of work. It ranges from Residential General Contractors for residential or home improvement houses with an amount starting from 9,000 to Commercial Specialty Contractors for the construction of buildings and commercial spaces which will reach up to 50,000 depending on which state you live in. They are usually paid annually. The amount can also be increased anytime but cannot be decreased except at the time of renewal of  the contract.

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