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Contractor Bonds

I recently opened my own small contracting businessin California. A lot of people are telling me I need to get bonded. What’s that all about?

California requires licensed contractors to be bonded. If you fail to maintain the necessary bond, California can yank your license, just like you can have your driver’s license suspended for failing to maintain insurance on your car.

It’s not just your clients that benefit from you being bonded. Small contracting firms like yours, and even individuals in the building trades, benefit greatly from purchasing bonds. It shows clients that you are committed to ethical conduct and can be trusted to perform your services according to the terms of the contracts you sign. Being bonded gives your clients peace of mind and gives you an edge over your un-bonded competitors.

Aren’t contractors’ bonds the same as insurance?

No, contractors’ bonds are not a form of insurance. Sure, they compensate the client if you in any way fail to keep up your end of the bargain, so to speak. But you then have to repay the bonding company. This gives clients assurance that they will get paid no matter what, and it buys you some time because the bonding company is essentially loaning you the money paid out to those clients in fulfillment of your financial obligations. You repay the amount paid out, plus interest. You may also be responsible for paying collection costs and attorneys’ fees.

What kinds of things can a contractor get coverage for by paying for a bond?

In California, there are a number of different types of contractors’ bonds, but different bonding companies may refer to them by different names. Bid bonds, maintenance bonds, performance bonds, payment bonds, contract bonds—these are just some of the terms you will run into when shopping for bonds. That’s why it’s so important to tell any bonding companies you might use what your specific needs are. For example:

  • Do you need a bond to pre-qualify you to submit a bid on a specific contract? There is a kind of contractors’ bond that guarantees that you are submitting your bid in good faith and will not change the amount of your bid once it comes time to sign a contract.
  • Or do you need a contractors’ bond that provides general liability policy coverage against any defects in your work for a certain number of days, weeks, or months after you’ve finished—a sort of shake-down period during which any defects in materials or workmanship should surface if they’re going to?
  • Or how about a bond guaranteeing that you perform your work in accordance with the terms of the contract?
  • Or maybe you need to guarantee payment of suppliers and anyone working for or subcontracting to you?

You tell the bonding company what your needs are and they will tell you what kinds of bonds would meet those needs.In some cases, different coverages can be bundled into one bond.

How much will I have to pay for contractors’ bonds in California?

Many factors enter into bond pricing, and those factors vary, depending on what type of bond you need and how much the bonding company could expect to pay out in a worst-case scenario. Still, bonds are inexpensive compared to insurance, because you are required to repay the bonding company—less risk for the bond company means lower rates!