Contractor license bond requirements vary significantly by location. In Florida, the rules can be a little different.

Following is the breakdown of who requires a Florida contractor license bond:

Credit Score Under 660: If the credit score of a contractor is under 660, then the contractor is generally forced by the state into acquiring a license bond as evidence of financial responsibility.

Financially Responsible Officer (FRO): The government also demands a $100,000 surety bond as a surety bond on behalf of any person who is the Financially Responsible Officer on behalf of any construction company.

Local Municipalities and Counties: Most counties and cities in the state of Florida have unique bond requirements across all general and specialty contractors. Their local bonds ensure local building codes, ordinances, and regulations are followed.

Specialty Trades: Whereas certain licenses are administered on a state basis, a large number of specialty contractors like roofing, plumbing, and heating and air conditioning professionals are frequently mandated to be certified and hold a matching bond on the city or county level.

In a nutshell, although a statewide bond may not be needed by all contractors, all will require a license bond at the local or state level in order to be able to work legally. It would be very important that each contractor should verify the particular requirements of the county and the city in which they will be working.

Consumer Protection: It is the major cause why bonds are issued, and that is the protection of consumers, tax money, as well as project owners. In the event that a contractor defaults on completing work, or when he commits any form of fraud, then the consumeree can file a claim on the bond, thereby recovering his losses.

Industry Integrity: By mandating that contractors be bonded, the state and local government can impose a specific level of quality and ethical practices into the industry. It ensures that just competent and financially stable contractors are licensed.

Risk Spreading: Without the license bond, the risk of the non-performance of a contractor would directly be on the client. By the bond, the risk is transferred to the surety firm, and the surety firm ensures the project is finished or pays the amount required to put the client in the same financial situation.

A contractor license bond is a type of surety bond that works as a three-party agreement:

• The Principal: The contractor who is required to obtain the bond.
• The Obligee: The state, county, or municipality that requires the bond to grant a license.
• The Surety: The company that issues the bond and provides the financial guarantee.

Each party has a distinct role in the bonding process:

The Contractor (Principal)

As the Principal, you are the one responsible for obtaining the bond. In doing so, you are making a financial guarantee to the Obligee and the public that you will operate your business ethically and in full compliance with all applicable licensing laws and regulations. If you fail to meet these obligations and a claim is paid out, you are legally responsible for reimbursing the surety company in full.

The Licensing Agency (Obligee)

The Obligee is the government entity that requires the bond. This entity sets the rules and regulations that contractors must follow to maintain their license. If a contractor fails to adhere to these rules—such as by engaging in fraud or performing work outside their license—the Obligee or an affected party (like a client) has the right to file a claim against the bond to recover financial losses.

The Surety Company

The Surety is the company that provides the financial guarantee. They essentially vouch for the contractor's reliability and financial stability. If a valid claim is filed against the bond, the surety will pay the claim up to the full bond amount. However, the surety is not taking on the risk themselves; they are acting as a guarantor. This means that if they pay out a claim, they will seek full reimbursement from the contractor.

When a claim is filed against a contractor license bond, the surety company that issued the bond will conduct a thorough investigation. Their goal is to determine if the claim is valid and if the contractor is at fault for violating licensing laws

If the Claim Is Valid

If the surety company finds that the claim is valid, they will pay the claimant up to the full bond amount. However, this is not the end of the process for the contractor. As the Principal of the bond, the contractor is legally required to reimburse the surety company for every dollar paid out on the claim, including any legal fees or interest. While a repayment plan can sometimes be arranged, the financial burden ultimately falls on the contractor.

The Consequences of a Claim

A claim against your license bond can have serious consequences beyond the financial. A valid claim can lead to the state licensing board or a municipality re-evaluating your license. While the surety company does not have the power to revoke your license, the licensing board can and may do so if they find you have violated licensing rules and regulations.

Therefore, the best way to avoid a claim is to always conduct your business ethically and in full compliance with all laws. This protects your finances, your business, and your license.

The cost of a contractor license bond, known as the premium, is a small percentage of the total bond amount. This amount is set by the state or local government and can vary significantly.

Factors that Determine Your Rate
 

The premium you pay is determined by a surety company's underwriting process, which assesses your level of risk. The most significant factors include:

• Credit Score: Your personal and business credit history is the most important factor. Contractors with excellent credit (typically a FICO score of 660 or higher) will qualify for the lowest rates, often as little as 1% to 3% of the bond amount. Those with poor credit will face higher premiums, sometimes reaching up to 10% or more.
• Financials: The surety company will review your financial stability, including business and personal financial statements, to ensure you are capable of repaying any claims.
• Experience: A proven track record of successful projects and a clean history without prior bond claims can help lower your rate.

For example, a $5,000 bond required by many Florida cities and counties may cost a contractor with good credit as little as $100 to $150 per year. In contrast, a contractor with a low credit score may pay a significantly higher premium.

Keep in mind that Florida has several specific bond requirements, such as the $100,000 Financially Responsible Officer (FRO) bond or the $5,000 to $20,000 bond for contractors with a credit score below 660. The cost of these bonds will also vary based on the factors listed above.