Senate Bill 392 requires any contractors who want to start a LLC to obtain a $100,000 surety bond in addition to the $12,500 contractor bond that’s already required. The new bond is for the benefit of any employee affected by an LLC’s failure to pay wages or fringe benefits.

In the past, contractors starting LLC’s were not able to get a contractor license in the state of California. Now the only way to do so is to obtain the $100,000 bond on top of the $12,500 contractor license bond that is already required of California contractors. If all goes as planned, the CSLB (Contractors State License Board) should be accepting applications from LLC applicants by the January 2012 deadline.

Any contractors aspiring to start an LLC will not be taking this new $100,000 bond requirement lightly simply because it will be costly. Surety bond pricing is based off a percentage of the bond amount (roughly 2-20%) which is calculated by the contractor’s credit history and financial strength. Even if a contractor is financially sound and qualifies for a low rate e.g. 2%, they will still have to pay $2,000 for the bond!

Although it’s unclear why California contractors have been unable to open an LLC in the past, they will be able to in the near future; but it could very well end up being costly which may drive contractors from even considering the option of an LLC at all.

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.

A gigantic hailstorm in 2009 left thousands of citizens with damage to their houses. Many out-of-town roofers migrated to El Paso to get a piece of the plentiful repair work, but soon after city officials noticed a spike in complaints about faulty workmanship. The contractor license bond amount required of contractors at the time was only $10,000 which usually was not enough to cover the cost of damages from the storm.

To combat the problem of shoddy contractors, the city of El Paso boosted the surety bond amount required of construction companies seeking to build houses or commercial buildings. The required bond was raised from $10,000 to $50,000 for contractors which they need in order to be eligible for city permits on many residential and commercial projects. The increased bond amount is better suited to deal with more serious damage such as the damage from the hailstorm.

It seems like an obvious choice to raise the bond requirement for contractors after thousands of roofs started to fall apart. While the increased bond amount does better protect the citizens of El Paso, it will prevent many contractors from obtaining work; about 15% of the 2,500 contractors in the city have been able to obtain the raised bond amount in order to stay legal with the state. The main roadblock for these contractors is poor credit which makes it harder to get a bond since the eligibility and price is based mostly off of credit. Unfortunately for these contractors, the citizens come first especially since the surety bond increase was a result of the questionable work performed by contractors in the first place; so the city chose to boost the protection.

There is hope for the contractors having trouble acquiring surety bonds. JW Surety Bonds is the exclusive provider of several bond programs for people with credit issues.  The rates are a fraction of other hard to place bond programs and approvals are done instantaneously online.  Applying online for a bond has never been easier.

After the storm passed and people were left with leaking homes, the City of El Paso did what it needed to do to benefit their people. Although many contractors are having trouble obtaining surety bonds, there is always an alternative company to help with hard to place bonds; if you happen to fall in to this group feel free to give JW Surety Bonds a call at (888) 592-6631 and we will be happy to set you up with what you need to run a licensed business.