California Performance Bonds
Surety Bond Professionals is a family owned and operated bonding agency with over 75 years of experience. With access to a broad range of surety markets, our expert agents are ready to assist with all of your performance bond needs.
What Are California Performance Bonds?
California performance bonds provide protection for state or local contracting authorities against additional costs incurred due to a contractor’s failure to complete a construction job in accordance with legal and contractual requirements.
Who Needs Them?
The California Public Contract Code section 10221 establishes the requirement for contractors selected for public works contracts to furnish a performance bond for contracts exceeding a certain dollar amount. The definition of public works includes “the erection, construction, alteration, repair, or improvement of any state structure, building, road, or other state improvement of any kind.” The performance bond amount typically must be equal to 100% of the total contract value.
Although there is no statutory requirement for performance bonds for privately funded construction projects, they are required by many private project owners to protect themselves and their investors against financial loss.
How Do California Performance Bonds Work?
There are three parties to a California performance bond:
- the obligee (the contracting authority or private project owner requiring the bond),
- the principal (contractor) required to furnish the bond, and
- the surety (the bond’s guarantor).
The surety determines whether a claim submitted by the obligee is valid and guarantees its payment if it is, but the legal obligation to pay valid claims belongs entirely to the principal. The surety’s guarantee is to extend credit to the principal for the purpose of paying a claim if necessary. The surety will do that by paying the claim initially and then being repaid by the principal.
The surety can take legal action against a principal who does not repay that debt, and the principal would end up having to pay court costs and the surety’s legal fees as well as their own.
How Much Do They Cost?
California performance bonds are sold for an annual premium that’s determined by multiplying two factors: the bond amount and the premium rate. The obligee sets the bond amount, and the surety assigns the premium rate based on an assessment of the risk of not being repaid for claims paid on the principal’s behalf.
For larger projects, the surety will want to examine the principal’s financial statements and the contract itself to make sure the principal can handle a project of that size. But the risk of non-repayment is measured primarily on the basis of the principal’s personal credit score.
A high credit score is a sign of financial responsibility, which means the risk level is low, which deserves a low premium rate. A low credit score is a warning sign for high risk, which calls for a higher premium rate.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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