CONSTRUCTION BONDS

By Adrian J. Adams, Esq.. Adams & Kessler LLP

When dealing with contractors, boards should be aware that there are 2 categories of bonds associated with construction work.

Contractor's License Bond. All contractors are required to have a contractor's license bond of $10,000 with the State of California. This does not guarantee performance or competence. Instead, it helps compensate victims when contractors violate licensing laws. Association boards and managers should always check the Contractors State License Board before signing any contracts to make sure (i) the contractor is licensed for the type of work he will perform, (ii) no action has been taken against his license, and (iii) he is properly bonded.

Construction Bonds. Before associations start large, expensive projects (usually reroofing, repiping, and large-scale painting projects), boards sometimes require the general contractor to purchase construction bonds, also known as surety bonds. The bonds are a negotiated part of the contract and are purchased specifically for the job. Contractors usually pass the expense on to the association. If the association borrows money to fund the project, the lender may require the bonds.

The cost of the bonds reflect the risk assigned to the contractor by the bonding company. If a particular contractor is new to the industry or has a poor track record, the bond will be more expensive or the bonding company may refuse to insure the contractor altogether. Rates for construction bonds typically range from 1/2 to 1% of the contract price. There are 3 kind of construction bonds:

Bid Bond. A bid bond guarantees that the bidder will enter into the contract at the bid price and provide the required performance and payment bonds.

Completion Bond. A completion bond, also known as a performance bond, ensures the project is completed in the event the contractor fails to perform. It does not guarantee that the work will be free of defects, only that the work will be completed. Labor and material warranties normally address defect issues.

Payment Bond. Contractors will sometimes collect payment from the association but then fail or refuse to pay their own subcontractors and suppliers, who then file mechanics liens against the association. The payment bond guarantees that these bills are paid.

Adrian J. Adams, Esq., is a Managing Partner of the law firm of Adams & Kessler LLP