There are three parties to a bond/surety agreement: the principal, which would be the contractor performing the work; an obligee, which would be the building owner or general contractor that you are working for; and the surety, who would pay the obligee in the event of the contractors default.

License bonds are usually required by state or local governments as a prerequisite to working in a particular jurisdiction. A landscape contractor working as a home improvement contractor, electricians or plumbers all could require a license bond in a particular jurisdiction. A license bond is a guarantee that you will comply with local laws and ordinances but also complete a project in good faith. If you have some assets and good credit this is not a hard product to purchase and reasonably priced. There are several types of contract bonds: bid, performance, payment and maintenance bonds.

Some contracts require that all bidders to a particular project provide a bid bond which is a guarantee that you will enter into a contract if awarded the job. Bid bonds turn into performance bonds, a guarantee that you will perform according to the plans and specifications. Payment bonds guarantee that when complete the project will be free of liens. This is sometimes called a labor and materials bond. A maintenance bond protects the project owner against faulty workmanship or defective materials. This is required once the project is completed for some specified period of time.

Obtaining a bond is not much different than getting a loan from a bank. It is a process that requires a great deal of time and information. When underwriting a bond the surety is concerned with the contractual obligation, the bond amount, their obligation in the event of your default, and your qualifications. They are looking at your capacity, character and capital. The sooner you start the process the less stress you will face at bid time. A bond is like a line of credit, apply in advance and only pay for the bonds you need. Some basic information is required such as two to three years of business financials, including a balance sheet and income statement. Depending on the bond size the financials may have to be prepared professionally. Personal financials, a schedule of work on hand and a profile of operations will also be required. Keep in mind that the surety is concerned with your ability to complete the project, even with stellar financials you might be hard pressed to obtain a performance bond for your first million dollar project at a competitive price.

Source