What is a contractor surety bond, and how does it work?
A contractor surety bond is a three-party agreement that helps guarantee you’ll meet the terms of your contract.
Here’s how it works: You, the contractor (the principal), pay a fee to a surety company to guarantee your performance for your client (the obligee).
If you don’t complete the project as agreed — for example, by missing deadlines or failing to meet specifications — the surety may compensate your client up to the construction bond’s value. Then, you’re on the hook for repaying the surety for that amount.
For your customers, a surety bond helps ensure their project gets finished. For you, it shows professionalism and builds credibility.
Compare contractor surety bond vs. contractor business insurance: What’s the difference?
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Contractor surety bond
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Contractor business insurance
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Who does it protect?
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The client or project owner
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You and your business
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Who’s involved?
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The obligee, principal and surety
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The insured and the insurer
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What does it cover?
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Guarantees contract performance or compliance
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Helps cover some costs for accidents, injuries or property damage
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Who requires it?
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Clients, lenders or licensing boards
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Often required by law or contracts
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Who pays for claims?
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The surety pays the client, then gets reimbursed by you
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The insurer pays covered claims directly
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What’s the scope of coverage?
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One project or license at a time
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The policyholder’s business and ongoing projects
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A contractor bond is a three-party agreement among you, your client and a surety company. It mainly protects your client by guaranteeing that you’ll complete the project according to contract terms. Each bond typically applies to a specific project or license requirement.
Contractor insurance is an agreement between you and your insurance company that helps protect your business from the cost of some covered losses. You buy a policy (like general liability insurance, workers’ compensation insurance, or tool and equipment coverage) and keep it active across all your jobs. It can help cover costs from accidents, injuries, theft or property damage that happen while you’re working.
Do contractors need both bonds and insurance?
Many contractors carry both, because bonds and insurance work together — one helps build trust with customers, and the other helps protect your livelihood.
Together, carrying both insurance and a surety bond can help you:
- Qualify for more projects. Many clients and public agencies require proof of both before you can bid or begin work.
- Build customer confidence. Showing that you’re bonded and insured signals professionalism and accountability.
- Protect your bottom line. Insurance can help cover unexpected accidents or property damage while the bond helps cover performance-related issues.
- Stay compliant with regulations. Most states and municipalities require one or both for contractor licensing.
- Keep projects moving. If something goes wrong, your coverage and bond can help resolve claims faster and minimize financial disruption.
Learn more: Understanding insurance terms: bonded and insured
Why do contractors need surety bonds?
Most states and many private clients require contractors to secure a bond before work begins. These bonds verify that you’re financially responsible, can meet licensing standards and are prepared to complete the project as promised.
Even when not required, being bonded can help you stand out. It signals to potential clients — and to government agencies — that you’re trustworthy, accountable and ready for bigger projects.
The surety bond market is growing fast as more construction projects require proof of financial reliability. In fact, U.S. surety bond activity rose by roughly 10% in 2024, reflecting stronger demand from both public and private projects.
That means more clients — and state and local licensing boards — are asking contractors to be bonded before work begins.
How much does a contractor surety bond cost?
Costs vary by bond type and your risk profile. License and permit bonds are usually renewed annually and often cost between $100 and $1,000 per year for small contractors.
Project-specific contractor bond costs are often priced separately for each job and typically cost 1%–10% of the total bond amount.
Surety companies consider several factors when setting your premium rate, including:
- The total bond amount required
- The contractor’s state
- Type of work being done
- The contractor’s personal credit history
- The company’s financial strength (based on submitted financial statements)
- Years of contracting experience
- Verification of personal and business assets
- Prior bond claims for incomplete or poor quality work
After reviewing these factors, the surety company classifies contractors by risk.
If you have solid financials and a clean record, you’re likely to pay a lower premium. Contractors with limited experience, poor credit, or past bond claims may pay higher rates.
Pro tip: Credit score plays an especially important role. Contractors with strong credit and proven financial stability can often secure bonds at the lower end of the pricing range.
How do contractor surety bonds protect contractors and clients?
Surety bonds don’t just protect your clients — they help protect your reputation, too.
When you’re bonded, your clients know that even if something goes wrong, they won’t be left with an unfinished project or unexpected costs.
Here’s an example: Imagine your team is halfway through a remodel when a key subcontractor falls ill or a critical shipment of materials is delayed for weeks. Suddenly, you can’t meet your deadline or finish to spec.**
If that happens, the surety company may step in to pay another contractor to complete the work or reimburse your client for added costs up to the bond’s value. You’ll repay the surety later, but the bond keeps the project moving — with your reputation intact.
Problems like these are more common than many realize. A 2024 survey found that 70% of risk managers saw more subcontractor distress or defaults than the year before. Surety bonds help keep those challenges from turning into full-scale business losses by ensuring projects get completed and clients stay protected.
In short, surety bonds preserve trust — between you, your clients and everyone who depends on your work.
What are the different types of contractor surety bonds?
The type of contractor surety bond you need depends on the kind of work you do and the project requirements. Each bond serves a specific purpose — from getting licensed to guaranteeing project performance and payments.
Surety bonds are becoming more common across the construction industry as demand grows. The global surety market expanded by 7% in 2024, reaching nearly $20 billion, with North America making up about 43% of that total. For contractors, that growth means more clients and agencies are expecting bonds as part of doing business.
Here are the most common types of contractor bonds:
- Contractor or license bonds: Many states and local agencies require these before you can get a contractor’s license. They help ensure you follow building codes and meet professional standards.
- Bid bonds: Often required for government or large commercial projects, bid bonds show that your proposal is accurate and financially sound. They reassure clients that, if you win the bid, you’ll be able to provide the required performance and payment bonds and complete the work.
- Performance bonds: These are the most common type of surety bond. They guarantee that you’ll complete the project as agreed in the contract. If you walk off the job or fail to meet standards, the surety may pay to have the work finished correctly.
- Payment bonds: Protect subcontractors and suppliers by ensuring they get paid for their work and materials. If a project is abandoned or delayed, the bond covers those payments — helping prevent costly disputes.
- Maintenance or warranty bonds: Cover warranty obligations after a project is complete. If defects or issues arise within the warranty period (usually one to two years), the bond helps pay for necessary repairs or corrections.
Together, these bonds create a safety net for both clients and contractors — and help you qualify for more work.
How to get a contractor surety bond
Getting a contractor surety bond is a straightforward process — and many surety companies now let you complete the entire application online.
Here’s how to get bonded step by step:
- Confirm which bond you need. Identify the type of surety bond required for your project or state license (for example, a contractor license bond, bid bond or performance bond).
- Determine your bond amount. The project owner or licensing agency typically sets this amount based on the project size and potential risk.
- Choose a reputable surety company. Compare providers or ask other contractors which sureties they trust.
- Complete the bond application. Apply for a contractor bond online. You’ll provide basic business details, financial statements and, in some cases, personal credit information.
- Wait for underwriting review. The surety company evaluates your application to determine your premium rate (usually 1%–10% of the bond amount).
- Buy and receive your bond. Once approved, you’ll pay the premium and receive your bond certificate.
