What is a Contractor License Bond?

Are you about to obtain a contractor license? Apart from getting licensed, the largest part of states requires these professionals to become bonded as well. The role of license bonds is to prevent clients from sustaining any financial losses due to the negligence or unprofessionalism of contractors.

The amount of these bonds depends on the occupation, claim history, and credit score of candidates. Aspiring contractors in the state of Washington are obliged to obtain a Washington State contractor license bond in order to perform contracting work.

Learn more about the importance of this legal document.

How does it work?

A contractor license bond has to be obtained in order for one to become a licensed contractor by adhering to the requirements of a particular state or city. It serves as a guarantee that the project will be completed in compliance with the law and the contractual policy. In case the project fails to meet the expectations, bonded contractors are held responsible for any financial loss or law violation.

Moreover, states impose specific requirements when it comes to the acquirement of a license bond but candidates are also advised to check the conditions specified by their municipalities. These requirements are usually determined by the cost of the project as well as the number of workers involved in the performance of the job.

In addition, this type of bond represents an agreement between three parties, those being the obligee, principal, and surety. The obligee refers to the project owner or investor, which requires contractors to get bonded and provided with a license. The principal refers to the person required to obtain a surety bond, whereas the surety refers to the company whose job is to issue it. Click here to learn some useful tips about becoming bonded.

These surety bonds are of great importance both to the obligee and the principal. The obligee requires principals to be bonded to ensure these professionals abide by state laws and regulations, hence being financially liable in the event of harming the health or safety of project owners. Conversely, becoming licensed and bonded helps contractors seem more trustworthy and professional in the eyes of potential clients due to their willingness to take financial responsibility in case of violating the agreement.

How do claims work?

In case the obligee believes the principal has violated state laws or the rules of the agreement, he/she is entitled to file a claim. Nevertheless, the surety will only provide the money following a detailed investigation whose purpose is to determine whether the principal failed to adhere to the legal requirements. If so, the obligee is financially compensated immediately after the investigation is completed.

When the obligee gets paid, the debt is transferred to the surety, which is later supposed to gather the claim amount from the principal. Apart from the money for the claim, the surety will also charge the principal for any extra costs such as the investigation fees as well as interest. Consequently, principals find settlements with obligees more convenient than claims.

How much does it cost?

The cost of contractor license bonds is calculated based on multiple factors. The credit score of candidates is considered important in the underwriting process, as the surety has to be reimbursed in the event of a filed claim. Anyhow, candidates aren’t supposed to be worried about these credit checks, as these have no negative effect on their credit score. The better the score, the lower the quote. See the following link, britannica.com/topic/credit-score, for a better understanding of the importance and calculation of credit scores.

Moreover, the credit score isn’t the only factor that influences the bond cost. The record of previous claims of the principal plays a major role in the calculations, as these increase the risk. The larger the number of claims, the higher the cost. These bonds are valid during a one-year period, after which contractors are supposed to renew them by making a premium payment once again. Since credit scores are reevaluated before the legal document gets renewed, candidates might end up paying a lower premium.

Final word

Being bonded is essential for any professional doing contracting work in the state of Washington!

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