Understanding Surety Bonds

Surety bonds aren't insurance—they're a form of credit. Here's what they are, how they work, and why contractors need them.

What is a surety bond?

A surety bond is a three-party agreement: the principal (you), the obligee (whoever requires the bond), and the surety (the bonding company). The bond guarantees you'll fulfill an obligation—follow regulations, complete a project, or pay your subcontractors.

How is it different from insurance?

Insurance protects you from losses. Bonds protect others from you. If the surety pays out on a bond claim, they come after you to recover the money. That's why bonding companies underwrite you like a lender—they're extending credit.

Common types of bonds

• License & permit bonds: Required to get or maintain a contractor license. Guarantees you'll follow state/local regulations.
• Bid bonds: Required for public projects. Guarantees you'll enter the contract at your bid price if you win.
• Performance bonds: Guarantees you'll complete the project per contract terms. If you default, the surety steps in.
• Payment bonds: Guarantees you'll pay your subcontractors and suppliers. Often required alongside performance bonds.

What affects bonding capacity?

Because bonds are a form of credit, the surety looks at:

• Personal and business credit scores
• Financial statements (balance sheet, income statement)
• Work history and experience
• Current work-in-progress
• Banking relationships

How much do bonds cost?

Bond premiums are typically 1-3% of the bond amount for contractors with good credit and experience. A $25,000 license bond might cost $250-$500/year. Larger contract bonds (performance/payment) are priced based on the contract value and your financial strength.