Contractor License Bonds For Dummies

Are you trying to improve your home right now, but do not know if you should hire a contractor or not?  I definitely understand that feeling. The choice can feel quite difficult, especially when we hear some of the horror stories surrounding contractors that have been going around in the past few years. As I started to do some research to learn about what my options were, though, I learned about something quite interesting: contractor license bonds. Before this, I had never even heard of them. However, today I am here to explain what they are and how they work to you!

What they Are

First things first – before we get too much further, I want to emphasize that I am discussing what contractor license bonds are specifically in the state of California. Certain laws and regulations may be different in other parts of the country, so bear that in mind as you continue reading. This is the perfect resource for any residents of California, though.

Putting this as simply as I possibly can, it is a contractual agreement made between the three parties involved with the project being completed. These entities are as follows: the principal, the oblige, and the surety. I know it sounds complicated but stick with me.  Consider reading this page, https://www.investopedia.com/terms/c/construction-bond.asp, for some more information before continuing.

Principal

Let us start out here, since it is probably the easiest of the three to understand. The principal is the contractor. Essentially, they are the one looking to have a bond service for their business. Pretty simple, right?  So is the rest of it, don’t worry.

Oblige

As the name might suggest, this is the entity in which the principal is responsible to. Thus, they are enforcing the need for a bond onto that first party. Basically, you can think of them as “the law” in a loose sense of the phrase.

Surety

What is the final piece of the puzzle, then?  Well, it is the insurance company, of course!  Therefore, the surety is just the insurance company that will end up covering any damages or mistakes covered under the agreement of the bond.

The Different Types

As you can see, it is not too difficult to grasp the different moving parts at play with a bond. I would say that the true key to finding California contractor license bonds is to understand what you are looking for in specific, though. Thus far, I have only covered this in a very broad sense.

In particular, I want to cover three of the ones that you may encounter. These are payment, performance, and bid bonds. Let us examine each of them in detail.

Payment

Again, what you see here is pretty much what you get – it is a way to ensure that the contractor gets paid for their work. Sometimes, you may see them called a “material and labor” one as well, so be on the lookout for that. In addition to the contractor being compensated, it is also there to make certain that they can then pay for any materials or labor in which they have utilized to finish the job.

Performance

Following a similar pattern to above, this is the precursor of sorts to the payment bond. A performance one is set in place to keep a project on track and to make sure that the quality of work remains consistently high. Basically, it is there to protect whoever owns the bond from any financial loss if the contractor turns out to do shoddy work.

Bid

The necessary preface to this section is that when a contractor job is available, there is often a bidding process to determine who gets the position in the end. So, during this, each of those potential hires submits their bid bond. Why is this in place?  Well, again, it is to protect whoever is in possession of the initial project just in case something goes wrong.

So – there you have it!  A simple guide to what these are and how they work. If you are still a bit confused, do not worry. You can check out the additional sources that I linked or do some of your own research!