Surety bonds are required for virtually all high profile construction projects to begin, yet they remain a mystery to many. Some have never heard of “surety bonds” or “contractors bonds” as they are commonly referred to in the construction industry, so acquiring one can be unclear all in itself. Bonding requirements vary from one area to another; for those looking to start a construction project in California, the following areas can help define local surety bonding principles:
Surety bond definition
A question often asked regarding construction bonds is, “What is a surety bond?” In simplest terms, surety bonds are legally binding contracts. For contractors, the agreement involves three parties: an obligee, a principal and a surety.
Obligee: the agency or government entity requiring the bond
Surety: the agency selling the bond that will be responsible for repayment of damages should the contracting company be found to be in noncompliance with the protections the surety bond guarantees
Principal: the individual or company purchasing the bond
Each bond affirms the principal will adhere to the laws specific to the surety bond. In construction, the most commonly acquired bonds are performance, payment and bid bonds. Performance bonds guarantee the contractor will complete the work per the specifications of the contract. Payment bonds ensure laborers and suppliers will be compensated for their work; and bid bonds certify the price the contractor offered to bid upon a project will be offered should the firm win contract award.
California surety bond requirements
The Miller Act requires construction projects exceeding $100,000 to hold both payment and performance bonds regardless of the state the work is being conducted is in. Specific to California, contractors must also hold a CA contractor’s bond to be written for $12,500 by a surety company licensed through the California Department of Insurance. For those looking to find a surety agency that is licensed in California, the National Association of Surety Bond Producers includes information on finding agencies able to produce bonds by geographical location as well as an education center to obtain answers for the most commonly asked surety bonding questions.
Cost of a surety bond
One of the biggest misconceptions of surety bonds is how they are calculated. Surety bonds are not based on one flat fee; rather their costs are determined by a number of factors including the financial history of the principal, the industry in which the bond is needed and how much the bond is protecting. Surety bond costs for those with standard credit can range between 1 to 5 percent of the bond amount. Those with less than average credit histories can also apply for a bond as many nationwide surety agencies offer bad credit programs for applicants. These bonds, however, are more costly and can range between 5 and 20 percent of the bond amount.
Consequences of not obtaining a bond
As with any legal requirement, there are severe outcomes for those who perform work without a surety bond. Fines, legal retribution and, in some instances, one’s license can be revoked. Should an agency be found to be working without the protection of a surety bond, it will ultimately destroy their chances of obtaining a surety bond in the future.