Difference between licensed, bonded, and insured contractors
Do you need to be licensed/bonded?
Cost of a contractor license bond
How to get bonded as a contractor?
Benefits of having a licensed, bonded contractor
Suppose you’ve just bought a new house, and everything about it is perfect—except that one thing. The muddy gray floor tiles, perhaps. Or the weird peachy color of the carpet? You decide to hire a contractor to help you realize your dream home. If you opt to hire an unlicensed contractor, however, there could be a whole host of problems: they are not obligated to pull permits or get inspections done; if they do a bad job with your home or get injured on the job, you are liable for all of these added fees.
Hiring a contractor is a complicated and scary process. To avoid this contracting nightmare, it’s important to know that you're working with someone who is reliable and qualified. One way to ensure that you're working with a trustworthy contractor is to hire a bonded contractor. In this article, we'll take a closer look at what a bonded contractor is, how being bonded is different from being licensed and insured, why it's important to work with a bonded contractor, and how to get bonded as a contractor. We'll also explore state requirements, the differences between bonded, licensed, and insured contractors, and the costs associated with obtaining a contractor license bond.
In the simplest terms, a bond is a form of insurance that protects against financial losses that can result from an individual or business (or the principal) failing to fulfill a promise or obligation to another party, called the obligee. If the principal fails to meet their obligations, the bond can be used to compensate the obligee for this oversight or failure.
A contractor is an individual or business that provides a specific service to clients. In the construction industry, contractors are responsible for building, remodeling, and repairing structures such as homes, commercial buildings, and roads. However, contractors can also provide services in other industries such as landscaping, plumbing, and electrical work.
A bonded contractor is a contractor who has obtained a surety bond from a bonding company. A contractor's bond serves as a guarantee that the contractor will complete a project in a satisfactory manner. If the contractor fails to meet their obligations, the bond can be used to compensate the project owner for any financial losses incurred as a result.
While the terms "licensed," "bonded," and "insured" are sometimes used interchangeably, they actually refer to three different ways to describe the protection that a contractor can have.
A licensed contractor is an individual who has completed the necessary contractor education and training requirements and obtained a contractor license to operate in their state. Possessing a license means that a contractor has passed specific expertise related tests related to the licensing process, which helps to ensure the quality of contracting work. The licensing requirements vary by state but typically include passing an exam and providing proof of insurance and bonding.
A bonded contractor is one that has obtained a surety bond from a bonding company. As mentioned above, this often goes hand in hand with getting a license to be a contractor in a certain state, as obtaining a contractor bond is typically one of the crucial steps to getting licensed in most states.
An insured contractor is a contractor who has obtained a guarantee from an insurance company that they will financially cover the contractor in the event of unexpected losses. Unlike bonds and licenses, insurance is typically optional, but oftentimes a good idea for contractors. Contractors typically obtain a general liability insurance policy, which provides coverage for business liabilities the contractor may encounter such as damage to their client’s property or accidental injury. If these unexpected circumstances arise, the proper insurance can help cover medical expenses, legal fees, and other costs.
35 of the 50 states require contractors to be bonded in order to obtain a license to operate.
In different states and for varying kinds of contracting work, it is not always necessary to be bonded or licensed to do contracting work. Many states have monetary thresholds for contractors license requirements.
For example, in Louisiana, a contractor’s license is only required if the total project amount of a commercial project exceeds $50,000. However, this varies largely by state. Similarly, a handyman only needs to be licensed and bonded in Louisiana for home improvements or residential projects where the labor and materials cost over $7,500.
In California, all businesses or individuals who construct or alter any building, highway, road, parking facility, railroad, excavation, or other structure must be licensed by the California Contractors State License Board (CSLB) if the total cost exceeds $500. Contractors must also be licensed before submitting bids.
In Texas, while there are license requirements, there is no contractor bond requirement at all.
Because the requirements for being bonded as a contractor vary so much by state, it's important to check with your state's contractors licensing board to determine the requirements for contractors in your area. We’ve helped countless contractors get bonded and are intimately familiar with the process, so if you have any questions, feel free to reach out.
The costs for contractor license bonds vary from state to state. Additionally, different states have different requirements for the types of bonds a contractor needs to operate their business. In some states, a contractor may need to purchase multiple bonds to be fully bonded and licensed, depending on the type of contracting work they do. For example, in California effective January 1, 2023, a contractor whose license is qualified by a Responsible Managing Employee (RME) or a Responsible Managing Officer (RMO) with less than 10% of the corporation’s voting stock will need to obtain both a Contractor’s Bond and a Bond of Qualifying Individual. (For context, an RME or RMO serves as an authorizing party to qualify a company or LLC’s contracting license and is responsible for direct supervision over the employer’s project.)
The cost of a contractor license bond depends on two numbers: the bond amount, which is most often set by the state, and the premium rate, which is an individualized percentage of the bond amount that a contractor must pay to obtain the bond. This rate is often determined by multiple factors, the most important being the contractor’s credit score.
To get a contractor license bond, a contractor does not need to pay the full bond amount, but rather only the premium, which is calculated as:
Premium = Bond Amount x Premium Rate (ranges from 0.5% to 15%).
The cost of a bond varies significantly based on the state and even city in which the contractor operates. For example, in California, the bond amount for a general contractor is $25,000, while in Missouri, the amount is $10,000. The premiums for these bonds in California and Missouri is typically around 1%, while in Texas, where a contractor's bond is optional, it can be as high as 20%.
Here is a rough list of the bond amounts of contractor license bonds in each state.
| State | General Contractor License Bond Amount |
| Alaska | $5,000 |
| Alabama | Varies |
| Arizona | $9,000 to $15,000, depending on type |
| Arkansas | Varies |
| California | $25,000 (as of Jan 1, 2023) |
| Colorado | Varies |
| Connecticut | $15,000 |
| Delaware | $10,000 to $20,000 |
| Florida | $5,000 to $20,000 |
| Georgia | $25,000 |
| Hawaii | $5,000+ |
| Idaho | $2,000 to $15,000 |
| Illinois | $5,000 to $50,000 |
| Indiana | $5,000 to $20,000 |
| Iowa | $5,000 to $25,000 |
| Kansas | Varies |
| Kentucky | $10,000 for type A, $20,000 for type B |
| Louisiana | $10,000 to $25,000; price for contractors is always $100 annually |
| Maine | $1,000 to $1,000,000 |
| Maryland | $20,000 |
| Massachusetts | $5,000 to $20,000 |
| Michigan | Varies |
| Minnesota | $3,000 to $25,000 |
| Mississippi | $2,000 to $10,000 |
| Missouri | $10,000 |
| Montana | $3,000 to $20,000 |
| Nebraska | Varies |
| Nevada | $1,000 to $500,000 |
| New Hampshire | Varies |
| New Jersey | $15,000 |
| New Mexico | $10,000 |
| New York | $20,000 |
| North Carolina | $2,000 to $25,000 |
| North Dakota | $5,000 to $50,000 |
| Ohio | $5,000 to $25,000 |
| Oklahoma | $5,000 |
| Oregon | $10,000 to $20,000 for residential, $20,000 to $75,000 for commercial |
| Pennsylvania | Varies |
| Rhode Island | $20,000 |
| South Carolina | $10,000 to $15,000 |
| South Dakota | $10,000; $20,000 for building contractors |
| Tennessee | $10,000 - $50,000 |
| Texas | $25,000 |
| Utah | $15,000 to $50,000 |
| Vermont | $1,000 to $1,000,000 |
| Virginia | $50,000 |
| Washington | $6,000 or $12,000 |
| West Virginia | Varies |
| Wisconsin | $25,000 |
| Wyoming | $5,000 and $20,000 |
To get a contractor license bond, we recommend that you work with a surety broker. The reason we suggest this is because contractor bond prices vary widely across surety companies and a surety broker can help you shop around to get the best prices. Here are the steps you'll typically need to follow:
For more detailed steps, refer to our guide on how to get a surety bond.
Because of the risks associated with operating with an unlicensed and unbonded contractor, some states have strict consequences for being an unlicensed contractor or falsely posing as a licensed contractor. In California, for example, felony charges are filed against anyone who illegally uses another person's contractor license or who tries to mislead consumers into believing that he or she is a licensed contractor.
These policies are put in place because there is a large difference between using an unlicensed and licensed contractor. The largest benefit is increased protection. A bonded contractor provides customers with an additional layer of protection in the event that the contractor fails to meet their obligations. For example, if you hired a bonded contractor to do your floors and they are done poorly, unfinished, or take far too long, you can make a claim on the bond and recuperate financial loss.
In the majority of states, including California, Washington, Oregon, and Arizona, the state’s contractors licensing board lists contractors by their name, license number and company name on the state licensing site. Other information such as how long the contractor has been licensed in the state, if any complaints have been filed against them, or whether they have a bond and insurance are available as well.
In the case that your state lacks a website containing this information, you can instead find the licensing department’s phone number on your state website and give them a call. The information should be open to the public, so in most cases, you can anticipate getting confirmation on whether your contractor is bonded and/or licensed.
Otherwise, you can ask your contractor for proof of their bond. The right proof includes a bonding certificate from an accredited surety bond company. Make sure that the certificate indicates the right type of bond for the work the contractor is doing and that the bond company is accredited to provide bonds in your state.
For contractors, getting licensed and bonded (if necessary in the state) is an important step in your contractor career. Not only does it ensure that you are operating according to the regulation set out by your state, but it also helps with building trust with your customers.
For consumers, choosing a bonded contractor can provide peace of mind knowing that you will be compensated in case of any unforeseen disputes with the contractor. It is crucial for consumers to research prices, bonding qualifications, and certifications before hiring a contractor. If you run into any issues with this research, don’t hesitate to give us a call and we’d be happy to help you out.
