Are Contractor Performance Bonds Really Necessary?

When it comes to construction projects, it tends to be the norm that certain bonds are required by law to be put into place. One of the bonds this typically pertains to is the performance bond. Because these regulations have existed for many years, people do not often think about why they were instituted in the first place. When a contractor is unable to obtain and produce the necessary bonds, it isn’t uncommon for the contractor to call into question whether the laws are unfair. So why were these laws enacted, what purpose does the performance bond serve, and is it really necessary?

Are Contractor Performance Bonds Really Necessary

What is a Performance Bond?

The purpose of a performance bond is to ensure financial and legal protection for the individuals involved in a construction project. The bond is essentially an agreement secured by the contractor as a way of guaranteeing to the owner of the project that the work will be completed according to what was negotiated in the contract. In short, the bond holds the contractor accountable for performing the work fully and properly. Should the contractor fail to complete the project, the surety agency will step in to ensure that the work is fulfilled and that the project owner is not left with an unfinished project at the hands of an unreliable contractor. Sometimes the surety agency will even serve as an intermediary throughout the process to ensure that the work is being completed on track in accordance with the contract, which provides the owner with additional confidence.  Here is some more information on performance bonds.

Is a Performance Bond Really Necessary?

In short, yes. There are laws in place at the federal, state, and even local levels to ensure that performance bonds (in addition to payment and bid bonds) are being utilized for public projects. These laws benefit taxpayers by holding contractors accountable and thus ensuring that taxpayer money isn’t being wasted on endless construction projects that don’t get completed on time, or at all, due to contractor unreliability. Even construction projects involving private property will often take advantage of the protection and security afforded by performance bonds. In addition, some money lenders have even come to require them.

In the end, it is truly in the best interest of the project owner to make use of performance, payment, and bid bonds as part of their construction projects. The primary purpose of the performance bond is to protect the project owner from unfinished projects and contractor failure, and in the end, this is what makes it possible for both public and private project owners to employ the lowest responsive bidder to complete the project, while being able to trust that the work will be completed as agreed upon.

The Cost of a Contractor Bond in California

WHAT IS A CONTRACTOR BOND?

California State Laws require that all licensed contractors should maintain a $15,000 license bond with the Contractors State License Board (CSLB) as a condition for maintaining an active license, or post cash in replacement of this bond. The CSLB requires some contractors to post disciplinary bonds, on a case-by-case basis, before commencing construction work in California.

The Cost of a Contractor Bond in California

This bond serves as protection for consumers who have been financially harmed as a result of a contractor’s work, or a contractor’s employees who may be owed unpaid wages. For example, if you hire a contractor to construct a swimming pool for your house and something goes wrong, the bond will serve as payment for damages, accordingly. This bond amount of $15,000 is increased by the state on a periodical basis. It increased from $12,500 as a result of a Senate legislation effective January 1, 2016.

CREDIT SCORE RATING

California Contractor Bonds are most of the time based on credit and other factors such as license history. HCC surety currently offers a bond that will not take credit into account for the first year if the contractor meets certain criteria.

In order to qualify, the new contractor must not have been associated with another license in the past, and must not have a different classification. Depending on one’s credit, the current cost of a license bond generally varies from around $100 per year with good credit and license history, to well over $1300 per year for those with poor credit or other factors such as a license complaint, bankruptcy, and prior bond claim. Contractors can post $15,000 cash with the state in lieu of a license bond.

DISCIPLINARY BOND

If a license has been revoked for a violation of the Contractors’ License Law, the company must file a disciplinary bond with the Registrar in order to reinstate or reissue the license (Business and Professions Code Section 7071.8).

In order to apply for this bond, the contractor must specify the reason of their application. The amount of this bond varies according to credit score.

QUALIFYING INDIVIDUAL BOND

The Qualifying Individual Bond or QIB ensures that payors comply with Division 3, Chapter 9 of the Business and Professions Code. This usually costs $12,500 annually and payments vary according to credit score.

FARM LABOR CONTRACTOR BOND

By posting this bond, contractors agree to comply with Labor Code provisions. If the contractor fails to do so, damages suffered must be paid in full amount. The Farm Labor Contractor Bond is worth around $25,000 a year.