Contractor Bond: What It Is, Covers and Costs
A contractor bond is a three-party guarantee. You (the principal) promise a state licensing board or a project owner (the obligee) that you will follow the law or finish the contract, and a surety company backs that promise by paying valid claims up to the bond amount. The surety then collects what it paid from you. There are two families: license bonds, which a state requires before it issues or renews your license, and project bonds (bid, performance and payment), which owners require on a specific job, including federal construction contracts over $150,000.
How a contractor bond works: the three parties
The Small Business Administration’s surety bond rules define the roles in a way that applies well beyond its own program. The principal is the person primarily liable to complete the contract. The obligee is the person who contracted with the principal, or who requested the bids. The surety is the company that agrees to pay the obligee if the principal breaches the bond’s conditions.
Put a license bond into that frame. When California’s Contractors State License Board (CSLB) asks for a $25,000 bond, the bond is filed with the board, the surety signs it, and you are the principal whose conduct it guarantees. The customer who is harmed is the one who makes the claim.
The detail that surprises new owners: the bond is not there to protect you. Under the SBA rules, a surety’s loss on a bond is reduced by any sums it recovers “from indemnitors and other salvage.” The indemnitors are whoever signs the indemnity agreement the surety asks for when it issues the bond, which can include your company and you personally. Read that agreement before you sign it, because it is the document that decides what you owe the surety after a claim.
License bonds and project bonds side by side
| License bond | Project bonds | |
|---|---|---|
| Who requires it | A state or local licensing authority | The project owner, by contract or by public-works law |
| Who it protects | Consumers and, in some states, unpaid workers | The owner (bid and performance bonds) and subs and suppliers (payment bonds) |
| How the amount is set | Fixed by statute or rule, such as California’s $25,000 | Tied to the bid or the contract price |
| How long it lasts | As long as the license, renewed with it | For that job, plus any maintenance period |
The SBA describes four project bond types. A bid bond assures the owner that the bidder will provide the payment and performance bonds if it wins. A performance bond assures that the contract is completed. A payment bond assures that suppliers and subcontractors are paid. An ancillary bond covers requirements outside performance and payment, such as maintenance.
On federal work, the Miller Act sets the floor. The statute requires performance and payment bonds before a federal construction contract is awarded, and the Federal Acquisition Regulation applies that requirement to construction contracts exceeding $150,000 (FAR 28.102-1). The payment bond must equal the total amount payable under the contract unless the contracting officer finds that impractical, and it cannot be less than the performance bond. Federal bonds must come from a surety named in the Treasury’s Circular 570, which lists the companies that write or reinsure federal bonds.
What does a contractor’s bond cover?
A license bond covers the harms the licensing law names, up to the bond amount. California’s CSLB is specific: claims may be filed by homeowners, by any person damaged by a willful and deliberate violation of a construction contract, and by employees damaged by the contractor’s failure to pay wages. An LLC licensee in California also carries a separate $100,000 bond for employees and workers damaged by the LLC’s failure to pay wages and fringe benefits, on top of the $25,000 bond every licensee files.
What a license bond does not cover is just as important:
- Injuries and accidental damage. A customer who slips on your tarp, or a ceiling ruined by a leak from your work, is a general liability insurance claim, not a bond claim.
- Your own losses. A bond never pays you.
- Anything above the bond amount. A $25,000 bond pays at most $25,000 in total, and claims against it reduce what is left for the next claimant.
How a surety bond claim plays out
Here is the sequence for a license bond, using California because CSLB publishes each step.
- The customer goes to the surety. CSLB says the consumer contacts the surety directly, finds it on your license detail page, and must file within the time limits. CSLB itself does not process claims against surety companies.
- The surety investigates and pays valid claims. If it contacts you, answer in writing, with the contract, change orders and photos.
- Your bond shrinks. CSLB’s suspension page says your license is suspended if a judgment or payment of claim reduces the amount of a required bond or cashier’s check.
- You restore the bond or lose the license. A suspension lifts when a new bond is received, or when the surety rescinds a cancellation, within the windows CSLB sets. If the surety cancels instead, the cancellation takes effect 30 days after CSLB receives the notice, and without a replacement the license is suspended.
- The surety bills you. Under the indemnity agreement, you repay what it paid out, plus whatever costs the agreement makes you responsible for.
Worked through: a homeowner’s $9,000 claim is paid on your $25,000 bond. Your coverage is now $16,000, so your license is suspended until the full $25,000 is in place again, and the surety expects $9,000 from you. The claim cost you $9,000, a gap in your license, and possibly a higher premium at renewal. That is why a bond claim is worth settling directly with the customer whenever the complaint is fair.
A cash alternative changes the mechanics but not the result. CSLB accepts a $25,000 cashier’s check instead of a bond. A consumer then has to file a civil action, and CSLB pays from the deposit only under a court order. The deposit cannot be released until three years after the license period it covers ends, or three years after the license is inactivated, expires or is canceled. See CSLB’s bond alternatives page for the current rules.
Which states tie a bond to plumbing, HVAC and electrical licenses
Contractor bond requirements differ widely by state. Some require a bond for every contractor, some require one only for certain trades, and some use a bond as an optional substitute for a net worth or working capital test. A sample from the boards’ own pages:
| State | Trade or license | Bond |
|---|---|---|
| California | Every contractor class, including C-20 HVAC | $25,000, plus a $25,000 bond of qualifying individual where it applies |
| Alabama | Heating, air conditioning and refrigeration contractor, active status | $20,000 performance bond |
| Minnesota | Mechanical contracting (no state license) | $25,000 mechanical contractor bond filed with the Department of Labor and Industry |
| Iowa | Plumbing and mechanical contractor license | Surety bond of at least $5,000, plus $500,000 public liability insurance |
| Oklahoma | Mechanical contractor | $5,000 corporate surety bond |
| New Mexico | Contractor licenses, including MM-3 HVAC | $10,000 corporate surety bond |
| Washington | Registered contractors, HVAC as a specialty | $30,000 general, $15,000 specialty |
| Nevada | All contractor licenses | $1,000 to $500,000, set by license type, monetary limit and financial responsibility |
| Arizona | Specialty residential contractors | $1,000 to $7,500 |
| South Carolina | Mechanical contractors licensed by the board | Optional bond in place of the net worth requirement, from $7,000 (Group One) to $300,000 (Group Five) |
Texas is an example of the other approach: TDLR’s requirements for air conditioning and electrical contractor licenses list insurance minimums and no bond. Rules change, so check your board’s current page before you buy a bond, and confirm the exact obligee name the board wants on the form.
Bond, insurance or both
A contractor license and bond show up together on truck doors as “licensed, bonded and insured”, and the three words mean three different things. The license says the state lets you do the work. The bond says a surety will pay certain claims against you and then collect from you. The insurance pays covered claims on your behalf and does not come back to you for the money, apart from your deductible. Our comparison of contractor insurance and bonds goes line by line, and the guide to surety bond cost shows how the premium is worked out.
If you cannot get bonded for public work, the SBA guarantees bid, payment, performance and ancillary bonds for eligible small businesses, up to $9 million for non-federal contracts and $14 million for federal contracts.
This is general information, not legal or insurance advice. For a claim against your bond or an indemnity agreement you are unsure about, talk to a lawyer licensed in your state.
FAQ
Is a contractor bond the same as insurance?
No. Insurance pays covered claims for you. A bond pays the obligee or claimant, and the surety then recovers that money from you under the indemnity agreement. The bond protects your customers; the insurance protects your business.
Who can file a claim against my license bond?
Whoever the state’s law names. In California that means homeowners, anyone damaged by a willful and deliberate violation of a construction contract, and employees who were not paid wages. Your board’s statute or bond page lists the claimants in your state.
What happens if my surety cancels my bond?
In California the cancellation takes effect 30 days after CSLB receives the notice, and if no replacement bond or rescission arrives, the license is suspended. Other states have their own notice periods, so treat any cancellation notice as urgent.
Can I put up cash instead of buying a bond?
Some states allow it. California accepts a cashier’s check or bank-certified check for the full bond amount, held until three years after the license period it covers. That ties up the cash, so compare it with the premium you would pay.
Do I need a bond for private residential jobs?
Only if your state’s license requires one or the contract asks for one. Project bonds are set by the contract or by public-works law for that job, and the license bond, where your state has one, covers every job you do under the license.
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