Infinitely less interesting than the Bonds of Ian Fleming’s novels (perhaps with the exception of Roger Moore), but certainly more important to your day-to-day working lives, are those other bonds of the construction variety which are as varied as those other Bonds with a capital “B.” In California, there are five types of construction bonds a contractor will typically run across: (1) License bonds, (2) Performance bonds, (3) Payment bonds, (4) Stop notice release bonds, and (5) Mechanics lien release bonds.
What is a Bond?
A bond is a legal contract governing a three-way relationship between a “principal,” “surety,” and “obligee” in which the surety guarantees a payment or performance obligation of the principal for the benefit of an obligee. The principal is the party with the payment or performance obligation, typically, an obligation to pay money owed or to perform work contracted for. The surety is the party who is responsible for guaranteeing the principal’s payment or performance obligation. The obligee is the party to whom the principal’s payment or performance obligation is owed. Construction bonds typically carry a premium, the amount which must be paid to obtain the bond, of 1 to 5% of the bond amount.
In California, all contractors, except contractors on federal projects, must file a license bond from an admitted surety with the California Contractors State License Board (“CSLB”) in the amount of $12,500. A license bond, as its name implies, must be filed before a contractors license will be issued or renewed, or an inactive license made active. A license bond is made in favor of the State of California for the benefit of:
Homeowners whose personal residences are damaged as a result of a violation by a contractor;
Property owners whose single family dwellings are damaged as a result of a violation by a contractor, but only if the dwelling is not intended for sale or offered for sale at the time the damages were incurred.
A person damaged as a result of a willful and deliberate violation by a contractor or fraud by a contractor in the execution or performance of a construction contract.
An employee of a contractor damaged by the contractor’s failure to pay wages.
A person or entity damaged as a result of a contractor’s failure to pay fringe benefits to its employees.
Note: An unlicensed contractor who was previously convicted in a court of law or cited by the CSLB for contracting without a license must file a license bond in the amount of $25,000. In addition, the CSLB may require a contractor whose license was suspended or revoked, but whose suspension or revocation has been stayed, to file a license bond in an amount no less than $15,000 nor more than $250,000.
In addition, a “qualifier bond” in the amount of $12,500 must be filed with the CSLB if the responsible managing officer (“RMO”) or responsible managing employee (“RME”) of the contractor is neither the proprietor, general partner, nor joint licensee of the contractor. However, a qualifier bond is not required if the RMO of a contractor incorporated as a corporation owns 10% or more of the voting stock of the corporation. In addition, a qualifier bond is not required if the RMO or RME of a contractor registered as a limited liability company (“LLC”) owns 10% or more of the membership interests in the LLC.
A performance bond guarantees the performance of a contractor, typically, full performance of the work contracted for. On federal projects, prime contractors are required to furnish performance bonds for federal construction contracts in excess of $100,000. In all other cases, whether a performance bonds is required is up to the agreement of the parties.
A payment bond guarantees payment by a contractor, typically, to lower tiered subcontractors and suppliers. On federal projects, prime contractors are required to furnish payment bonds for federal construction contracts in excess of $100,000. On California public works projects, prime contractors are required to furnish payment bonds for public works contracts in excess of $25,000. In all other cases, whether a payment bond is required is up to the agreement of the parties.
Stop Notice Release Bonds
A stop notice release bond releases funds which have been withheld by an owner or construction lender pursuant to a stop payment notice. When a stop notice release bond is filed, a stop payment notice claimant no longer has rights under its stop payment notice, and must instead make a claim against the stop notice release bond. A stop notice release bond is required to be in an amount equal to 125% of the amount claimed in the stop payment notice.
Mechanics Lien Release Bonds
A mechanics lien release bond releases property in which a mechanics lien has been recorded. When a mechanics lien release bond is filed, a mechanics lien claimant no longer has rights under its mechanics lien, and must instead make a claim against the mechanics lien release bond. A mechanics lien release bond is required to be in an amount equal to 125% of the amount claimed in the mechanics lien.