One of the first steps upon passing a contractors license exam is to secure bonding to post to the license. The exchange frequently has new contractors ask how, how much, and why bonds are required. The below F.A.Q. is a resource for new and prospective exchange members and provides questions for some of the more frequent bond questions that come up here at the exchange.
If you have any questions that haven’t been addressed or need help getting a bond, please contact Chris Larmore at Parenti & Associates Insurance. He is a Certified Insurance Specialist in Construction and has offered to be a free resource for Builders Exchange members.
Phone – (650)596-9500
Email – Chris@parentiinsurance.com
F.A.Q
Table of Contents
- Why do I need a bond?
- What is a bond?
- How is it different than Insurance?
- How much will it cost?
- How long does it last?
- What is a bid bond?
- What is a performance bond?
- How much do bid bonds cost?
- Am I eligible for a bid bond?
- How much is my bond limit?
- What kind of things effect bonding rates?
- I have been told I am ineligible for a bond, why?
A contractor’s license bond for $12,500 is required by the California Contractors State License Board in order for your license to be in good standing.
A bond is a guarantee by a company (Surety) that you will uphold your contractual commitments with third parties. Should you fail to meet contractual commitments, your bond with be garnished and you will be required to pay back the amount garnished to the surety company. Your license will then go into suspension until you have another bond posted.
The predominant difference between a bond and insurance is that with bonds, the amount of money “claimed” or “garnished” from the bond carrier is actually repaid back to the carrier. Whereas insurance claims are paid by the carrier and do not require repayment.
The cost of license bonds depends on years in business, credit, locality, type of license, and business credit. New in business contractors can expect to pay from $200-1,200 for a one year bond depending on credit history. Existing businesses with good credit can see rates as low as $229 for 5 years.
Bonds can be written for 1,2,3,4, or 5 year terms. Typically the longer the term the cheaper they are on a per year basis.
A bid bond is a guarantee from the surety company that for the purpose of a bid on a project, the contractor is bondable to the specified amount, and that the carrier will convert the bid bond into a performance bond, if the contractor’s bid is accepted. If they fail to do so, the guarantor will pay the difference between the contractor’s bid, and the next highest qualified bid. (Reminder: The contractor then is expected to pay back the bonding company for that amount.)
A performance bond is a converted bid bond, in which the surety company (bonding company) ensures payment of a sum of money if the contractor fails to fully perform on the project contract. (Reminder: The contractor then is expected to pay back the bonding company for that amount.)
Bid/Performance bonds typically cost 3% of the projects cost, but this is dependent on the financials, credit, company history, type of project, etc. Rates can be as high as 6% for uncollateralized bonds.
Your eligibility for bid and performance bonds is dependent on a surety company receiving a full submission on all of your financials and understanding your ability to do the project you are requesting the bond for. It is a great idea to work with a bonding company prior to actually needing the bid bond so they can talk to you about what you might qualify for, what the rates might be, etc. It usually takes a minimum of 5 days to turn around bond limit requests over $250,000 (after all the info is received!)
When a bonding company reviews a bid bond request and the scope of work, contract size, type of work, financial stability of contractor, credit history are undesirable to bond because the risk seems high, they may offer collateralized bonds. A collateralized bond requires the contracting company to guarantee the bond with an asset they own, most frequently property/buildings.
The most frequent reason companies are ineligible for bonds is that a prior bond had been garnished, or that there was a bankruptcy filed by one of the companies’ principals. For bid/performance bonds typically this means you cannot become a qualified bidder for that project until you are bondable again. For license bonds, you may post $12,500 in cash with the license bureau to keep your license in good standing.