Bonding, Licensing, and Insurance for Contractors
Understand the bonds, licenses, and policies that let you bid bigger work and keep one bad day from sinking the company.
The first time a general contractor or public agency asks for a bond, many trade owners are caught off guard. Then they discover the surety wants three years of financial statements, a personal guarantee, and a conversation about their work-in-progress. It feels like applying for a loan, because in many ways it is.
This guide walks through licensing, the main types of bonds, how sureties decide how much to bond you for, and the insurance policies most contractors carry.
Licensing comes first
Most states license contractors at the state level for at least some trades, and many cities and counties add their own requirements. Electricians, plumbers, and HVAC techs often hold individual trade licenses on top of the business license. Working unlicensed where a license is required can void your right to collect, so confirm the rules in every jurisdiction where you work.
Bonds: three parties, one promise
A surety bond involves three parties: you (the principal), the customer or government (the obligee), and the surety company that guarantees you will do what you promised. If the surety pays a claim, you signed an indemnity agreement promising to reimburse it, usually personally as well as through the company.
| Bond | What it guarantees | Who usually requires it |
|---|---|---|
| License bond | You follow licensing laws and consumer rules | State or local licensing boards |
| Bid bond | You will sign the contract at your bid price | Public owners, some private owners |
| Performance bond | You will complete the work per the contract | Public projects, larger private jobs |
| Payment bond | You will pay your subs and suppliers | Public projects, larger private jobs |
The Miller Act threshold
On federal construction contracts, the Miller Act and the Federal Acquisition Regulation require performance and payment bonds for contracts over $150,000. For contracts over $35,000 up to $150,000, the contracting officer requires alternative payment protection, such as a payment bond or an irrevocable letter of credit. Most states have similar laws for state and local public work, often called Little Miller Acts, with their own thresholds.
How a surety underwrites you
Underwriters often talk about the three Cs: character (your reputation and history), capacity (your experience doing jobs of this size and type), and capital (the financial strength to absorb a bad job). For small bonds, a credit check may be enough. For larger programs, expect deep questions.
- Financial statements: CPA-prepared statements, often reviewed or audited as your bonding needs grow. Tax returns alone rarely satisfy larger programs.
- Working capital: current assets minus current liabilities. Some sureties size your program as a multiple of working capital, so it is one of the most important numbers you have.
- WIP schedule: a current list of open jobs with gross profit fade or gain. See Job Costing.
- Bank line of credit: an unused line shows you can handle a cash squeeze.
- Personal financial statements: owners typically sign personal indemnity, so your personal balance sheet matters too.
Use a surety specialist
An agent who focuses on construction surety can tell you what your statements need to look like a year before you need a bigger bond. Ask how they view your working capital, your WIP, and any owner loans on the balance sheet.
The insurance stack
- General liability (GL): injury to others and damage to their property from your work, including completed operations after the job ends.
- Workers' compensation: medical bills and lost wages for injured employees. Required in nearly every state once you have employees, and auditors will charge you for uninsured subcontractors.
- Commercial auto: trucks and vans used for business. Personal auto policies often exclude business use.
- Inland marine (contractor's equipment or tools coverage): your tools and equipment while at the shop, in transit, or on site. GL does not cover your own stuff.
- Builder's risk: the structure under construction, often bought by the owner or GC.
- Umbrella: extra liability limits above GL and auto, commonly required by larger GCs.
Myth or fact? Tap to flip
Contracts often require additional insured status for the GC or owner, a waiver of subrogation, and specific limits. Read the insurance section before you bid, and send it to your agent. For the broader picture, see Business Insurance 101.
Contractor protection checklist
0/8 doneWords to know
- Surety
- The company that guarantees to the project owner that you will perform and pay as promised.
- Indemnity agreement
- Your promise to repay the surety for any losses it pays on your bonds.
- Inland marine
- Insurance for tools, equipment, and materials that move between locations.
- Additional insured
- Another party, like a GC, added to your liability policy for claims arising from your work.
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