Licensing requirements can vary across states and municipalities, including bond policies. In Florida, the state formerly mandated that contractors demonstrate a minimum net worth. The state now requires them to obtain a licensing bond in the amount of $20,000 or $10,000 — depending on the type of license — if the license holder’s FICO credit score is not 660 or higher. Contractors, however, can get around that requirement by providing an irrevocable letter of credit for the same amount as the value of the bond.
Bonds related to licensing are much easier — and less costly — to obtain than payment and performance bonds. These guarantee that the contractor or subcontractor providing the bond will perform all work according to the specifications, complete the job in a timely fashion and pay all of its project bills.
If the bonded contractor does not meet those obligations, then the surety company that issued the bond on the contractor’s behalf could be required to step in and make good on the work and payment of bills, the cost of which are based on the value of the project.
Bob Raney, head of construction surety at Travelers, told Construction Dive in 2016 that a contractor’s bond qualifications often boil down to the “three C’s,” — character (history of defaults and track record), capacity (how much work the contractor can handle successfully) and capital (cash flow and credit history). How a contractor is scores in these three areas determines bond premium rates or if the contractor will qualify for a bond at all.
