The following is a guest post by Kristen Bradley from SuretyBonds.com, a company that issues bonds to professionals and aims to help professionals understand the legal aspects of surety bonds and the bonding process.
Although surety bonds are used widely in California’s construction industry, contractors and those who represent them often have a limited awareness of how exactly they work. Government agencies have set surety bond laws for the construction industry to protect consumers. Some construction bond types also ensure payment for subcontractors or other employees who could be left waiting for payment after working on a project.
The terms “contractor bonds” and “construction bonds” are often used interchangeably to describe surety bonds that pertain to construction. No matter what they are called, both function identically as legally binding contracts between three parties:
- A principal: the contractor who purchases a bond as a guarantee of future work on construction projects;
- An obligee: the entity—typically a government agency—that requires a contractor to get a specific bond before beginning work on a project; and
- A surety: the provider who issues a bond to the contractor and acts as an intermediary between the client and the government agency.
If a contractor violates the bond’s terms or fails to follow other licensing regulations, a claim can be made on the bond. If the contractor cannot compensate the harmed party, then the surety will be liable for reparation in an amount not to exceed the bond’s face value.
Under Bus & P C §710.6, contractors must buy a $12,500 contractor’s bond before they can be issued a license to work within the state. The Contractors State License Board (CLSB) sets regulations for contractors working in California. Applicants can get the bond form directly from the CLSB or the surety provider with whom they plan to work. Because the surety could potentially be accountable for paying reparation for inadequate contractors, they conduct thorough financial checks of all applicants before issuing a California contractor bond.
Before beginning work on a project, the contractor considers using three primary contract bonds, each serving a different purpose:
- Bid Bonds: Submitted with a bid for a construction project and ensuring that a contractor will stick to the original bid given on a project.
- Performance Bonds: Guaranteeing the quality of work to be done on a project.
- Payment Bonds: Guaranteeing payments for all labor and materials used during a project.
That’s the basics on surety bonds in construction. Contractors and lawyers with questions about surety bonds or the bonding process should contact the CLSB or speak with a reputable surety specialist.
Surety bonds in the construction industry are discussed in CEB’s California Construction Contracts, Defects, and Litigation, which includes sample bond language.
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