California Contractor License Bond Requirements Are Increasing: Here’s What You Need to Know
In late September 2021, Senate Bill 607 was signed into law, changing the California contractor license bond amount from $15,000 to $25,000 and from $12,500 for the bond of qualifying individual to $25,000 as well. It has now become Chapter 367, Statute of 2021 of the California legal code. Here’s what you need to know to be prepared.
What Is the Existing Law?
The current Contractors State License law requires an applicant or licensee to file or have on file with the Contractors State License Board a contractor’s bond in the sum of $15,000. The existing law also requires a bond of qualifying individual if the license is qualified by a Responsible Managing Employee (RME) in the amount of $12,500, unless a qualified exception is met.
This law authorizes the board to set fees by regulation, including various application, examination schedule, and license and registration fees, according to a prescribed schedule. The law requires that these fees be deposited in the Contractors License Fund.
What Is Changing?
According to the new bill, when this updated law goes into effect, an applicant or licensee will have to file or have on file with the board a contractor’s bond in the amount of $25,000 instead of the former $15,000. Where applicable, it also requires a Bond of Qualifying Individual in the sum of $25,000 as well, increased from the original $12,500.
While more details will be forthcoming in the coming months, existing contractors with an active bond in the previously required lower amounts will likely be given the opportunity by their surety to pay a prorated premium to increase their existing bond to the new required limits and keep the same bond term, or have their bond term shortened by a prorated amount in lieu of not paying an additional premium, though these details are still in the early planning phases for most surety’s. However, this is how most surety’s handled the process when the bond amount was last increased.
The California contractors license bond requirement was last increased from $12,500 to $15,000 by SB 467 which took affect January 1st, 2016.
There are a few other changes of note, such as:
- The bill also changes the board’s authority to set fees by regulation and increases fee amounts
- The bill differentiates between an individual owner, as opposed to a partnership, corporation, limited liability company, or joint venture, and would authorize higher fees for the latter categories of licensees
- The bill authorizes the board to set fees for the processing and issuance of a duplicate copy of any certificate of licensure, to change the business name of a license, and for a dishonored check
Financial Impact For California Contractors
Surety bond companies generally price bonds based on their expected risk exposure based on past claims, so an increase in the bond amount from $15,000 to $25,000 will likely result in an increased premium, all things being equal, though the impact may not be as straight forward as a proportional increase in the bond amount leading to a proportional increase in the premium. There are many factors at play that could adjust this premium ratio a little up or a little down depending on the surety. As always, it pays to shop around.
A contractors credit will likely continue to be the primary driving factor in determining how much a contractor will pay for license bonding. With that in mind, now, more than ever, contractors would be well advised to prepare for this change by taking proactive measures to shore up their credit score. Now for the good news. As you will see below, contractors have plenty of time to plan for this change. (Collective sigh of relief)
When Will the Change Take Effect?
The new law takes effect on January 1, 2023, which sounds like a long way off. However, the time to start familiarizing yourself with the specifics of this bill and get prepared for the changes is now. A lapse in required bonds can mean big trouble for your business, including additional fees, penalties, a suspended licensed in addition to missed contract opportunities. Think through your plan of action sooner than later to ensure you don’t experience any delays or licensing issues. Your surety will inform you of your options with regards to keeping your bond compliant with state law. However, for the remaining of 2021 and the duration of 2022, the bond amounts remain unchanged and no change to your existing contractors license bond is required during this period.
Surety First is here to help you understand contractor bonds and meet the requirements for your business. Learn more about bonds on our site, or get a quick and easy quote from us if you’re ready to obtain a bond.