Contractors who wish to operate in California need to go through a licensing procedure with the Contractors’ State License Board. This process entails providing a $15,000 surety bond.
A recent legislation, Senate Bill 610, may lead to changes in the licensing and bonding requirements for contractors. The bill was introduced in February 2019 and is now on the move. It has already passed out of committee in the Senate and is undergoing hearings. If introduced as law, it would require the board to conduct a study on whether the current California contractor license bond amount is sufficient, or if it should be increased.
Find out the essential details about the proposed bill and how it may affect your California contracting business.
Changes in Senate Bill 610
The proposed bill, if enacted, would lead to a study on the appropriateness of the current contractor license surety bond amount in California. The amount now is $15,000 -- among the lowest bonding requirement for contractors in the country. The board will have to evaluate whether an increase is necessary to match the current economic conditions and the risks involved in construction contracting.
The license board will have to announce its findings, and the recommended course of action by January 1, 2024, giving enough time to contractors to prepare for the potential changes.
There are a few other changes that the bill may bring if it is accepted. It would lead to an extension of the deadline for the appointment of a Registrar of Contractors by the license board from January 1, 2020, to January 1, 2024.
In addition, the legislation would also make the rules for contracting businesses that have a judgment against them much stricter. In cases when there is a judgment against a licensee or personnel of record, qualifying persons and personnel of record are prohibited from serving in such roles until the judgment is satisfied.
License bond amounts vary
By introducing the bill in question, legislators in California are moving towards a potential increase in the contractor license bond requirement. One of the reasons for this is the fact that California is among the states that have relatively low bonding amounts for contractors. Lawmakers need to balance between ensuring enough protection for the general public, and an appropriate level of strictness towards the contractors.
The contractor license bond amounts range between $1,000 and $500,000 in all the states. However, in most places, there are separate bonding requirements for the different licensing types. Thus, contractors working on larger contract amounts or on specific higher-risk jobs, need to obtain larger bonding amounts. This is currently not the case in California where all types of contractors need a $15,000 surety bond.
The lowest bond amounts for contractors are in New Jersey ($1,000 to $3,000) and Idaho ($2,000), but they are exceptions. In most states, the requirements gravitate around $20,000 and above. Bonding requirements in Delaware can reach $200,000, $350,000 in North Carolina and $500,000 in South Carolina.
How bonding works for contractors
The purpose of requiring construction specialists to have a surety bond is to protect their customers and the state in which they operate. If you fail to follow applicable laws as a contractor, you can face a claim against your bond. It can provide fair compensation for any damages that a party may have suffered as a result.
The maximum reimbursement that can be demanded from you on proven claims is the full bond amount that you have posted. That is why the bonding amount is important. Lawmakers examine various factors to assess the appropriate requirements in each state.
In order to get your contractor license bond, you need to cover a small percentage of the required bond amount. It is formulated on the basis of your personal and business finances. The stronger they are, the smaller the perceived bonding risk is, which leads to a lower bonding premium. The rates that you can expect if your finances are in good shape are between 1% and 5% of the bond amount.
How do you see the effect of the proposed California bill on the construction industry in the state?
Vic Lance is the founder and president of Lance Surety Bond Associates. He is a surety bond expert who helps contractors get licensed and bonded. Vic graduated from Villanova University with a degree in Business Administration and holds a Masters in Business Administration (MBA) from the University of Michigan’s Ross School of Business.
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