What Is a Contractor Bond?
A contractor bond is a three-party agreement between the contractor (the principal), the homeowner or public (the obligee), and a surety company (the guarantor). If the contractor fails to meet their legal or contractual obligations, the bond provides a financial guarantee that the harmed party can recover damages — up to the bond amount.
Think of it as a financial promise backed by a third party. The contractor pays a premium to the surety company, and in return, the surety guarantees the contractor's performance. If a valid claim is filed, the surety pays the homeowner and then goes after the contractor for reimbursement. The contractor is ultimately on the hook — the surety just makes sure the homeowner doesn't have to chase the money alone.
Types of Contractor Bonds
There are three main types of contractor bonds, and each protects against different risks:
- License bond (also called a contractor license bond or permit bond): Required in many states as a condition of getting a contractor's license. It guarantees that the contractor will follow state laws and regulations. If they violate licensing requirements — working without proper permits, for example — you can file a claim against this bond. Bond amounts vary by state, typically ranging from $5,000 to $25,000.
- Performance bond: Guarantees that the contractor will complete the project according to the contract terms. If they abandon the job or fail to deliver what was agreed upon, the performance bond covers the cost of hiring another contractor to finish the work. Performance bonds are more common on large commercial projects but can be requested for substantial residential work as well.
- Payment bond: Guarantees that the contractor will pay their subcontractors, suppliers, and laborers. This protects you indirectly — if a contractor doesn't pay their suppliers, those suppliers can file a mechanic's lien on your property. A payment bond prevents that from becoming your problem.
How Bonds Protect Homeowners
The most common scenario: a contractor takes your deposit, does partial work (or none at all), and disappears. If the contractor has an active license bond, you can file a claim with the surety company to recover your financial losses up to the bond limit. Without the bond, your only option is civil court — which is slower, more expensive, and less certain.
Bonds also create accountability. A contractor who loses their bond can't renew their license in states that require bonding. And because the surety company underwrites the bond based on the contractor's financial history and track record, the existence of a bond means someone has already done a basic financial background check on the contractor.
Bond vs. Insurance: What's the Difference?
This is the most common point of confusion. Here's the simple breakdown:
- Insurance protects the contractor (and by extension, you) from accidental losses — property damage, injuries, unexpected events. The insurance company pays the claim and absorbs the loss. Learn more about contractor insurance and COIs.
- Bonds protect you from the contractor's failure to meet obligations. The surety company pays your claim but then recovers the money from the contractor. The contractor bears the ultimate cost.
A contractor needs both. Insurance covers accidents. Bonds cover broken promises. They're complementary protections, not substitutes for each other.
How to Verify a Contractor's Bond
Start by asking the contractor for their bond number and the name of their surety company. Then verify independently:
- Check with your state licensing board. In states that require license bonds, the bond status is usually part of the public license record. Use the same license lookup tool you'd use for license verification.
- Contact the surety company directly. Call the surety and confirm the bond is active, the coverage amount, and the named principal. Don't rely on documents the contractor provides — verify independently.
- Check the surety company's legitimacy. The surety should be listed in the U.S. Treasury's list of certified sureties. If they're not on the list, the bond may not be worth the paper it's printed on.
What Happens When You File a Bond Claim
Filing a bond claim is not like filing an insurance claim. The process typically works like this:
- Step 1: You submit a written claim to the surety company, including documentation of the contractor's failure — the contract, proof of payment, photos of incomplete or defective work, written communication, and a description of your damages.
- Step 2: The surety investigates the claim. They may contact the contractor for their side of the story. This process can take 30 to 90 days.
- Step 3: If the claim is valid, the surety pays you up to the bond amount. If the damages exceed the bond amount, you'll need to pursue the remainder through other channels (small claims court, mediation, etc.).
- Step 4: The surety company then seeks reimbursement from the contractor. This is called indemnification — the contractor is contractually obligated to repay the surety.
Important: Bond claims have deadlines. Most states require you to file within a specific window after the contractor's failure. Don't wait — document everything and file promptly.
Bond Amounts by State
License bond requirements vary significantly by state. Some examples to illustrate the range:
- California: $25,000 for general contractors (C-license)
- Florida: Varies by county; some require no state-level bond
- Arizona: Based on the contractor's license classification and project size
- Washington: $12,000 for general contractors
- Nevada: Varies by license classification, up to $100,000+
Check your state's contractor licensing board for the exact bond requirement. Keep in mind that the bond amount is a cap, not a guarantee — if damages exceed the bond, you'll need to pursue additional recovery separately.
When to Request a Performance Bond
For most standard home improvement projects (a bathroom remodel, new flooring, exterior painting), a license bond is sufficient. But for large-scale projects — whole-house renovations, additions, custom builds over $50,000 — you may want to request a performance bond. The contractor will pass the cost of the bond premium to you (typically 1-3% of the project cost), but the protection is substantial: if they abandon the project, the surety covers the cost of completion.
Pair bond verification with the rest of your due diligence: license checks, insurance verification, reference calls, and a thorough review of the written estimate.