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What Is a Contractor Bond?

    3 minute read

    “Licensed, bonded, and Insured.” It’s a phrase that almost immediately elicits trust in customers looking to hire a business for a project. Your company may be licensed and may have General Liability Insurance and a Business Auto Insurance, but is it bonded? Does it need to be? For most small and mid-sized companies this bond refers to a Contractor Bond. Let’s take a quick dive into what is a Contractor Bond.

    What Is a Contractor Bond?

    A Contractor Bond, also referred to as a Construction Bond, is a contract to guarantee performance. There are three parties involved in this type of bond—the contractor, their customer, and the insurance company (sometimes referred to as the surety). The Contractor Bond serves to protect the contractor’s customer from financial or other consequences in the case that the contractor can’t complete or satisfy the requirements of their agreement. Should the project be incomplete or unsatisfactory, the insurance company pays out the customer for their loss, typically the project owner or investor.

    Who Needs a Contractor Bond?

    Large projects and government contracts usually require a Contractor Bond. In these cases, a project won’t be agreed upon much less started without one. However, most small or mid-sized contractors won’t require a Contractor Bond. Nonetheless, many contractors purchase this type of bond for the sense of security it provides to their customers and for how affordable it is (depending on their credit).

    Do I Need a Contractor Bond if I Have a Commercial Umbrella Policy?

    If you need to or wish to have a Contractor Bond, you should acquire it separately. A Commercial Umbrella policy will not protect you in the same was a Contractor Bond will. That is because a Commercial Umbrella policy is usually an additional coverage that sits on top (extends coverage) of its underlying policies. To understand how a Commercial Umbrella Policy works, read this informative article.

    How much does a Contractor Bond cost?

    Contractor Bonds are relatively affordable, assuming good credit as it is the major factor in determining how much you’ll pay for the bond. With good credit, you can expect to pay around $100 for a $15,000 Contractor Bond that will be good for a year. The credit check performed by the insurance company will not be based on score (300-850) but rather a history of financial responsibility such as late payments. Therefore, a “soft-pull” or check will be performed, which does not affect your score. Remember, the purpose of the bond is to assure your customer that their project and investment is not at risk in your hands as the contractor. It guarantees that you can meet your financial and other specified obligations to the project. To the insurance company, your credit is a good indicator of your responsibility and the risk/chance that you won’t be able to fulfill your obligations.

    Of course, other factors play a role in determining how much you can expect to pay for a Contractor Bond, such as the amount of coverage desired. A licensed Commercial/Business Insurance specialist can easily assist you with that.

    How Do I Get a Contractor Bond?

    As noted right above, a Contractor Bond should be purchased from a licensed Business Insurance specialist. Ones with years of experience and the ability to compare rates, like the Specialists at AIS, will find you the best options available. With your business information handy (like contractor license number, desired coverage, and social/tax ID number), you can literally get a quote in about 5-10 minutes. Once purchased, proof of coverage is sent to you so that you can begin your project right away.

    Some contractors may prefer to purchase a Contractor Bond on a per-project basis or only when demanded by the customer. At times, contractors may not be certain of the coverage they should have. In such a case, a Business Insurance specialist will be able to quickly assist them in making the correct choice.


    The information in this article is obtained from various sources. This content is offered for educational purposes only. It should not replace the advice of a qualified professional. The definitions, terms and coverage in a given policy may be different than those suggested here. No warranty or appropriateness for a specific purpose is expressed or implied.