Why California Home Improvement Contractors Need Bonds
If you want to become a home improvement construction contractor in California, you will need to secure a contractor’s license from the state before you will be legally authorized to perform work. To obtain a contractor’s license in California, you will need to meet multiple requirements. One of these requirements is to secure a home improvement contractor bond. Here is what you need to know about these bonds and why they are required.
What Are Construction Bonds?
A construction bond is a surety bond required as a condition of licensing. While some people think that bonds are forms of insurance, there are some distinct differences.
A surety bond is a legal agreement between the following parties:
- Principal – The party that must get bonded
- Obligee – The party (typically, a government agency) that requires the principal to be bonded
- Surety – The bond company that approves the bond as a guarantee the principal will follow the law and perform as promised
When a contractor’s bond application is approved, the surety company will ask them to sign an indemnity agreement before issuing the bond. This agreement legally obligates the principal to pay the surety for any valid claims that might be filed against the bond.
If a project owner learns that the contractor provided substandard work or otherwise failed to comply with the contract or the laws, the owner can file a bond claim with the contractor’s surety company. The company will investigate the claim and pay it if it is validated. However, the contractor must reimburse the surety in full or face legal action.
A construction bond for a home improvement contractor operates as a type of credit that protects the people who hire the contractor rather than protecting the contractor against liability. While some states don’t require surety bonds, being bonded still makes it likelier that you will obtain home improvement projects since the risks faced by your customers will be lower.
Some states only require surety bonds for work worth over a threshold amount. However, California requires any contractor who performs work valued at more than $500 to obtain a contractor’s license and surety bond. This means that if you want to perform home improvement work in the state, you will likely need to secure both a license and a surety bond.
Benefits of a Surety Bond for Homeowners
Ensuring that a contractor is licensed and bonded is important for homeowners. A surety bond can protect against multiple problems, including the following:
- Contractor who fails to complete the job
- Contractor who doesn’t comply with the provisions of the contract
- Contractor who violates the building codes
- Contractor who damages the owner’s home or property
- Contractor who provides substandard work
- Contractor who fails to pay suppliers or subcontractors
In any of these types of situations, a homeowner can file a claim against the contractor’s bond. If the claim is valid, the surety company will then pay the homeowner to cover their losses up to the bond’s maximum value.
Why Home Improvement Contractors Must Be Bonded
Home improvement contractors in California are required to secure licenses if they want to perform almost any type of work in the state. One of the licensing requirements is obtaining a surety bond. If you don’t get a bond, you won’t receive a license and won’t be authorized to work in the state as a contractor. These bonds are required because they protect both the state and homeowners from the potentially illegal or unethical actions of the contractor that could happen during a home improvement project.
In addition to a contractor’s license bond, other types of construction bonds that a project owner might require include the following:
- Bid bond – Might be required for large renovation projects to ensure the contractor with the winning bid will follow through and perform the contract
- Performance bond – A type of bond that guarantees the contractor will perform as obligated under the provisions of the contract
- Payment bond – A type of bond that guarantees the contractor will pay the suppliers and subcontractors so that the homeowner won’t have to worry about mechanics’ liens
Requiring contractors to show proof they are bonded and licensed can help protect homeowners from potentially substantial financial losses. When a contractor is bonded, a homeowner can feel more confident that they will be protected.
How to Get a Contractor Bond in California
You can get a contractor’s bond in California by applying with a surety. The surety company might ask you to submit some documents along with your application so that it can evaluate the degree of risk the company would face by agreeing to bond you. The underwriters will assess various factors when deciding your level of risk, including your credit score, your industry experience, your company’s available working capital, your business reputation, and others.
If you have great credit and significant experience, the surety company will likely assess your risk level as low and provide you with a quote for a low bond premium. If your risk level is high, your application might be denied, or you might be given a high bond premium quote. The bond premium is the percentage of the bond’s maximum value that you must pay to obtain your bond and can be as low as 1%. If you have poor credit, you might have to pay 10% or more to secure your bond.
Once you are approved, you will need to pay the premium to purchase your bond and sign the indemnity agreement. The bond company will then give you a bond certificate that you can submit to the state when you apply for a contractor’s license.
While getting a surety bond might seem like yet another cost of doing business in California, being bonded can also make your services more attractive to homeowners who want to complete home renovation projects. After you have secured your bond and your license, make sure to follow the laws and meet your contractual obligations. If you do, your business might be likelier to succeed.