If you've applied for a contractor's license or bid on a public works project, you've almost certainly encountered the requirement for a surety bond. But surety bonds are one of the most misunderstood products in the construction industry. Here's a plain-language explanation of what they are, how they work, and what types contractors typically need.
What Is a Surety Bond?
A surety bond is a three-party agreement between:
- The principal: You, the contractor
- The obligee: The party requiring the bond (a state licensing board, project owner, or government agency)
- The surety: The insurance or bonding company guaranteeing your obligations
The bond guarantees that you will fulfill your legal or contractual obligations. If you don't — and a valid claim is filed — the surety pays the claimant up to the bond amount. Then, unlike insurance, you are required to repay the surety.
How Is a Surety Bond Different from Insurance?
Insurance protects you. If you have a covered loss, your insurance company pays and doesn't seek repayment.
A surety bond protects the other party — your client, the licensing board, or the project owner. The surety company pays claims on your behalf, but you're ultimately responsible for repaying them. Think of it as a credit product backed by a financial guarantee.
Types of Surety Bonds for Contractors
1. License & Permit Bonds
Required to obtain or maintain a contractor's license. California's CSLB requires a $25,000 contractor license bond. Nevada, Arizona, Utah, and Texas all have similar requirements with varying amounts. These are the most common bonds for contractors.
2. Bid Bonds
Required when submitting a bid on a public or commercial project. A bid bond guarantees that if you're awarded the contract, you'll actually sign it and provide the required performance and payment bonds. Typically 5–10% of the bid amount.
3. Performance Bonds
Guarantees that you'll complete the project according to the contract terms. If you default, the surety steps in to either complete the project or compensate the owner. Required on most public works and many commercial contracts over a certain dollar threshold.
4. Payment Bonds
Guarantees that you'll pay your subcontractors, laborers, and material suppliers. Often required alongside performance bonds on public projects under the Miller Act (federal) or Little Miller Acts (state level).
5. Maintenance Bonds
Covers defects in workmanship or materials for a defined period after project completion. Common on public works projects.
How Much Does a Surety Bond Cost?
The cost of a surety bond — called the premium — is a percentage of the total bond amount. For a license bond like California's $25,000 CSLB bond, most contractors pay $100 to $300 per year. The rate depends primarily on your credit score and business financials.
For performance and payment bonds on larger projects, rates typically run 1–3% of the contract value and depend on the size, duration, and complexity of the project as well as your company's financial strength.
Can I Get Bonded with Bad Credit?
Yes, though your premium will be higher. There are surety markets that specialize in working with contractors who have less-than-perfect credit. An experienced broker can help you find options even if you've been declined elsewhere.
Does My Contracting Business Need a Surety Bond?
Almost certainly yes — if any of the following apply:
- You hold or are applying for a state contractor's license
- You bid on public or government projects
- Your contracts require performance and payment bonds
- Your clients or GCs require bonding as a condition of hiring you
Altamira Insurance handles license bonds, bid bonds, and performance/payment bonds for contractors across California, Nevada, Utah, Arizona, and Texas. Contact us for a quick quote.