Contractor surety bonds
A surety bond is an agreement between a contractor, their client, and an insurance company. A bond guarantees financial reimbursement for the client if the business fails to complete a project according to the terms of its contract.
What is a contractor surety bond and how does it work?
A surety bond offers a financial guarantee that an insurance company will reimburse your client if your business doesn’t complete a project, breaks the terms of a contract, or fails to adhere to regulations.
A surety bond is a three-party agreement between:
- Your business (the principal)
- Your client (the obligee)
- The company that supplied the bond (the surety)
For example, a project owner might require a contractor to buy a $10,000 surety bond before they begin work on a new roof for a building. If supply chain issues force the contractor to drop the project, the bond company will reimburse the client for financial losses up to the bond amount.
Unlike insurance, this amount must be paid back to the company that sold you the bond.
What is the difference between a surety bond and contractor insurance?
There are a few key differences between bonds and insurance, though both provide important protection for contractors.
With a standard small business insurance policy, any claims on the policy are paid to the policyholder. An insurance policy also has a deductible that must be paid before you can collect on a claim.
Surety bonds, on the other hand, are more similar to a line of credit. They reimburse your client directly for any losses, but you must pay this amount back to the company that provided the bond. Bonds typically do not have a deductible.
When are surety bonds for contractors required?
Surety bonds are an essential part of a contractor's risk management strategy, and they're often required for contracts and licenses.
Public construction projects funded by taxpayer money almost always require a bond. Larger private clients will often require you to have a bond as well.
Certain classifications of contractors, such as general contractors, electricians, plumbers, and HVAC contractors, may need a bond in order to get licensed in their state. Your state might mandate a specific bond amount, or ask for proof of financial responsibility, business insurance, or a bond.
A surety bond helps prove your business is dependable—which can help you win contracts if you're just starting out. Any contractor could suddenly lose a key employee, face a supply chain disruption, or encounter other obstacles that prevent you from completing a project, which is why this protection is so important.
What types of contractor bonds are there?
There are several different types of commercial bonds for contractors. They provide financial guarantees for various aspects of a project, from the bidding process to completion.
License bonds and permit bonds
Contractors and construction companies may need a bond to obtain a license or permit, even before they start work on a project. These bonds guarantee that the company will comply with local laws and regulations.
Most states require general contractors, plumbers, and electricians to be licensed. As part of that process, they're usually required to buy a contractor license bond in an amount specified by the state. For example, general contractors in California must carry a $25,000 bond or cash deposit in that amount to get licensed.
Bid bonds
Contractors and businesses that bid on construction projects may be required to purchase a bid bond. If they win the construction contract but are unable to take on the project, the client is usually reimbursed the difference between their bid and the next lowest bid.
Performance bonds
A performance bond, also called a contract bond, guarantees that your construction company will fulfill the terms of its contract. If a contractor fails to complete the job, the client is reimbursed for any financial losses, up to the bond amount.
Payment bonds
This bond guarantees that all suppliers, subcontractors, and other third parties will be paid for their contribution to a project. With this type of bond, the client knows the project will be completed without any money owed for supplies or labor.
Fidelity bonds
Fidelity bonds, also called employee dishonesty bonds, are a key type of commercial crime insurance. If an employee at your commercial building company steals from a client, this bond will reimburse the client for their loss. Clients might require you to secure this bond before allowing your employees on their property.
A fidelity bond acts more like a traditional insurance policy than a surety bond, as it does not require the business owner to repay the bonding company.
Top contractors we insure
How much does a contractor surety bond cost?
Contractors pay an average of $9 per month for a surety bond, or $112 annually.
The cost of a surety bond mostly depends on the type of bond and its size. The premium is a small percentage of the bond amount, such as 0.5% to 3% for license bonds.
Your financial history, industry risks, and other factors that affect contractor insurance costs can also influence the cost of a bond.
What factors affect the cost of surety bonds for contractors?
Here are some of the top factors used in the underwriting process to calculate surety bond costs for contractors:
- Bond size. Because the premium is a percentage of the total bond amount, the size of the bond is the biggest factor in determining its cost.
- Financial history. Surety companies must be repaid after a claim, which is why your financial statements and personal credit score can impact how much you pay.
- Industry risks. Insurers will look at the risk profile of your profession. For example, a handyman likely has lower risks than contractors who take on bigger projects.
- Years of experience. A contractor who has been in business for a long time and never filed a claim can expect lower premiums for insurance and bonds.
- Business location. State laws can mandate a specific bond amount for licensed contractors, which will directly affect its cost.
- Type of bond. License and permit bonds are typically inexpensive, while you might pay more for performance and payment bonds.
What our customers are saying
Other key policies for contractors
A surety bond helps you get licenses and sign contracts, but it's not the only protection you need. Contractors should also consider:
- General liability insurance: This policy covers expenses related to third-party bodily injuries and property damage, along with advertising injuries. Contractors sometimes need this coverage to get licensed.
- Business owner's policy (BOP): A BOP bundles general liability coverage and commercial property insurance at a lower price than buying the policies separately. It helps pay for common lawsuits and incidents that damage or destroy business property.
- Workers’ compensation insurance: Workers’ comp pays for medical treatment if an employee is injured on the job. Most states require this coverage for businesses with employees, and more states are starting to mandate it for contractors, even if they don’t have employees.
- Commercial auto insurance: If a company vehicle is involved in an accident, this policy will pay for injuries and damage caused by the vehicle, including legal costs if the other party sues. If you use your personal vehicle for business, you may need hired and non-owned auto insurance (HNOA) instead.
- Inland marine insurance: This policy helps pay for the repair or replacement of a contractor's tools and equipment if they are lost, stolen, or damaged in transit or at a jobsite. It's also called tools and equipment insurance.
- Professional liability insurance: Also called errors and omissions insurance (E&O), this policy covers professional mistakes and oversights, such as a contractor missing a deadline for a project.
- Builder’s risk insurance: This policy pays for damage to a structure still under construction and any materials at the site, such as a fire that spreads from an adjacent building and destroys a contractor's lumber.
- Contractors pollution liability (CPL) insurance: Also called environmental insurance, this policy covers legal costs related to pollution. For example, hazardous dust released from a construction site might impact a neighboring property.
Get contractor insurance and apply online for a surety bond with Insureon
Contractors choose Insureon as a way to get all the insurance policies and bonds they need in one place, find answers from experts, and manage their coverage online. You can fill out our easy online application to get quotes from top-rated insurance companies today.
When you apply for a bond, we'll ask for information about your business and its projects, the type and size of bond you need, and similar details. Then we review your financial statements and credit score to determine the cost, which is a small percentage of the bond amount.
Our licensed insurance agents can help you find the right coverage for your business needs, including construction surety bonds of various types. Once you select a policy, you can begin coverage and get a certificate of insurance (COI) in less than 24 hours.
The average costs on this page were derived from our data on small business owners in the contracting field who purchased policies through Insureon. Most of our customers have less than five employees, annual revenue ranging from around $50,000 to more than $200,000, and five years or less in business.
Find contractor business insurance quotes
Want free expert advice right in your inbox?
By entering your email address and subscribing, you agree to our Terms of Use and Privacy Policy