Alabama Contractor License Bonds

At Surety Bonds Agent, we offer a full range of surety bonds nationwide through an extended carrier network. Continue below to learn more about Alabama contractor license bonds. If you have additional questions or want to explore bonding solutions for your business, speak with one of our knowledgeable surety bond experts.

 

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What Is a Contractor License Bond?

Not all contractors will need to purchase a contractor license bond. When one is required, the purpose is to protect project owners against financial loss resulting from the contractor’s failure to operate in accordance with state law and local regulations.

 

Who Needs One?

Alabama contractors planning to work on projects estimated at $50,000 or more must be licensed by the State Licensing Board for General Contractors. Contractors licensed to do business in Alabama must provide documentation showing they have at least $10,000 in working capital (also referred to as net worth). Those with a net worth less than $10,000 must post a contractor license bond before they can bid on construction projects.

Additionally, certain municipalities impose a local contractor license bond requirement for contractors working in those jurisdictions. The required amount for local contractor license bonds can be as little as $1,000 to as much as $100,000. Alabama’s bonding rules are rather complex, so make sure you know whether you must provide a contractor license bond and, if so, in what amount.

How Does a Contractor License Bond Work?

An Alabama contractor license bond is legally binding on three parties: the government entity requiring the bond (the bond’s “obligee”), the contractor purchasing the bond (the “principal”), and the party guaranteeing the bond (the “surety”).

If the obligee suffers a financial loss due to the unlawful or unethical actions of the principal, the obligee can file a claim against the bond. If the surety finds that the claim is valid, it must be paid. The principal is legally obligated to pay all valid claims. But the usual practice is for the surety to pay the claim initially and be reimbursed at a later date by the principal. That’s because the surety, as the bond’s guarantor, has agreed to extend credit to the principal, up to the full amount of the bond, if the surety lacks the funds to pay a claim immediately. The principal’s legal obligation thus becomes a legal obligation to repay the surety. Not repaying that debt can result in the surety suing the principal to recover the funds.

How Much Does It Cost?

Contractor license bonds are sold for an annual premium that is a small percentage of the required bond amount. That percentage is the premium rate, which the surety assigns on a case-by-case basis through an underwriting assessment of the risk involved in lending money to the principal. That risk is measured primarily in terms of the principal’s personal credit score.

A high credit score indicates that the risk of the surety not being repaid for claims paid on the principal’s behalf is low, so the premium rate also will be low, perhaps even lower than 1%. A principal with a lower credit score suggests a higher risk level, which results in a higher premium rate.

At Surety Bonds Agent, we offer a full range of surety bonds nationwide through an extended carrier network. Continue below to learn more about Alabama contractor license bonds. If you have additional questions or want to explore bonding solutions for your business, speak with one of our knowledgeable surety bond experts.

CONTACT US FOR A

FREE CONSTRUCTION BOND QUOTE

What Is a Contractor License Bond?

Not all contractors will need to purchase a contractor license bond. When one is required, the purpose is to protect project owners against financial loss resulting from the contractor’s failure to operate in accordance with state law and local regulations.

 

Alabama contractors planning to work on projects estimated at $50,000 or more must be licensed by the State Licensing Board for General Contractors. Contractors licensed to do business in Alabama must provide documentation showing they have at least $10,000 in working capital (also referred to as net worth). Those with a net worth less than $10,000 must post a contractor license bond before they can bid on construction projects.

Additionally, certain municipalities impose a local contractor license bond requirement for contractors working in those jurisdictions. The required amount for local contractor license bonds can be as little as $1,000 to as much as $100,000. Alabama’s bonding rules are rather complex, so make sure you know whether you must provide a contractor license bond and, if so, in what amount.

An Alabama contractor license bond is legally binding on three parties: the government entity requiring the bond (the bond’s “obligee”), the contractor purchasing the bond (the “principal”), and the party guaranteeing the bond (the “surety”).

If the obligee suffers a financial loss due to the unlawful or unethical actions of the principal, the obligee can file a claim against the bond. If the surety finds that the claim is valid, it must be paid. The principal is legally obligated to pay all valid claims. But the usual practice is for the surety to pay the claim initially and be reimbursed at a later date by the principal. That’s because the surety, as the bond’s guarantor, has agreed to extend credit to the principal, up to the full amount of the bond, if the surety lacks the funds to pay a claim immediately. The principal’s legal obligation thus becomes a legal obligation to repay the surety. Not repaying that debt can result in the surety suing the principal to recover the funds.

Contractor license bonds are sold for an annual premium that is a small percentage of the required bond amount. That percentage is the premium rate, which the surety assigns on a case-by-case basis through an underwriting assessment of the risk involved in lending money to the principal. That risk is measured primarily in terms of the principal’s personal credit score.

A high credit score indicates that the risk of the surety not being repaid for claims paid on the principal’s behalf is low, so the premium rate also will be low, perhaps even lower than 1%. A principal with a lower credit score suggests a higher risk level, which results in a higher premium rate.

 

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