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What Is a Bond?

In the most general terms, bonds are a promise to pay one party a certain amount if a second party fails to fulfill an obligation or terms of a contract. While bonds are used in several different types of industries, including catering, cleaning, and mortgage industries, they are most common in construction. Within the construction industry, there are many types of bonds, including surety bonds, license bonds, bid bonds, payment bonds, and performance bonds.

As a condition of licensure, contractors are required to post some form of security deposit with the Contractors State License Board (CSLB). Surety bonds are commonly used for this purpose, but cash or certificates of deposit may also be posted.

A surety bond is a contract in which a surety company promises the State of California that the contractor will comply with the provisions of the Contractors’ State License Law (CSLL) (Chapter 9 of Division 3 (commencing with section 7000) of the Business and Professions (B&P) Code.) Generally, the contractor’s obligation is to not commit any violations of the CSLL that are grounds for disciplinary action against the license. The law sets forth the specific violations which the bond will cover. If the contractor does not comply with the conditions of the bond, a consumer and/or an employee may file a claim against the bond. (B&P Code Section 7071.5)

 More information about bonds can be found at www.cslb.ca.gov

A surety bond should not be confused with an insurance policy as there are important distinctions between the two. One important distinction is that the contractor remains liable for his or her own obligation, and must repay the surety for losses incurred by the surety as a result of the contractor’s actions.

What is the amount of the required bond?

In California, the amount of the required bond is $15,000 for all classifications of contractors B&P Code Section 7071.6 (a)

The bond amounts are not per job-they are the amount available for all the jobs a contractor takes on during the life of the bond. In addition, the CSLB may require a separate bond for contractors who have been disciplined, and the amounts of these bonds vary.

Who benefits from a surety bond?

In California, persons who can make a claim against the bond are listed in the CSLL (B&P Code Section 7071.5), and include:

  1. Any homeowner contracting for home improvement work on the homeowner’s personal family residence damaged as a result of a violation of the CSLL by the licensee. 
  2. Any person damaged as a result of a willful and deliberate violation of the CSLL by the licensee, or by the fraud of the licensee in the execution or performance of a construction contract.
  3. Any employee of the licensee damaged by the licensee’s failure to pay wages.
  4. Any express trust fund damaged as a result of the licensee’s failure to pay fringe benefits for eligible employees.

What can a contractor do to avoid a claim against a bond?

In order to prevent a claim against a bond, a contractor should always put the terms of a construction contract, and any amendments, in writing. A contractor should maintain accurate records of payments made and received, and confirm in writing any agreements reached if the project is terminated. A contractor should communicate frequently and effectively with project owners and prime or subcontractors regarding any potential or actual problems.