If you are skilled in construction and want to start a business as a home improvement contractor, it’s important to understand your legal requirements. In California, all contractors who perform work on projects valued at $500 or more are required to obtain contractor licenses. This rule means that virtually all home improvement contractors are required to be licensed, and one of the conditions for obtaining a home remodeling contractor’s license is to post a bond.
Bond and Licensing Requirements for California Home Improvement Contractors
We’re GreatBuildz, a free service that connects homeowners in Los Angeles, Orange County, Ventura & San Diego with reliable general contractors.
Here’s what you need to know about the bond requirement for home improvement contractors in California.
What Type of License Do Home Improvement Contractors Need?
In Sept. 2020, Gov. Gavin Newsom signed SB 1189 into law. This law created a new contractor licensing category for residential remodeling contractors. The license required for residential remodeling contractors is called the B-2 contractor’s license. The Contractors State Licensing Board (CSLB) outlines the following requirements to obtain a B-2 residential remodeling contractor’s license:
- Have four or more years of experience working in at least three different crafts or trades on home remodeling projects
- Can substitute qualifying education for up to three years of the required experience
- Pass the B-2 residential remodeling contractor’s exam
- Post a contractor license bond
- Maintain worker’s compensation insurance
- Pay the application fee
Related: Why You Should Never Hire an Unlicensed Contractor
Understanding the Contractor License Bond Requirement for Home Improvement Contractors
Historically, contractors were required to post a $15,000 contractor license bond. However, on Sept. 28, 2021, Gov. Gavin Newsom signed SB 607 into law. Among other things, this law changed the contractor bond requirements and increased the required amount to $25,000 by adding Sect. 7071.6 to the Business and Professional Code. The new $25,000 contractor license bond requirement was effective in California as of Jan. 1, 2023.
This means that to obtain a license so that you can legally work as a residential remodeling contractor in California, you must first post a $25,000 surety bond.
What Is a Contractor License Bond for Home Improvement Contractors?
A contractor license bond is a surety bond that home improvement contractors are required to obtain as a licensing condition. A bond is a contract between various parties and is legally enforceable:
- Principal – The contractor required to post a bond
- Obligee – The agency that requires the contractor bond
- Surety – The bond company that issues a contractor bond and guarantees the principal’s legal and regulatory compliance and business ethics
A contractor bond is designed to protect others from potential misconduct by the contractor. When the surety issues a bond, the contractor must sign an indemnity agreement. This agreement is a legal contract through which the contractor agrees to hold the surety harmless in case a loss occurs after the contractor violates the law or the conditions of the bond.
If you break the law or fail to perform as obligated under your home improvement contract, the homeowner can file a claim against your bond. The surety will investigate and validate the claim. If it is found to be valid, the surety will be required to pay the claim up to the total bond amount of $25,000. Because of the indemnity agreement, you will have to repay the surety for the total amount it paid on your behalf. If you don’t, the surety can file a lawsuit against you and recover both the claim amount plus its legal fees and costs.
Why Does California Require Home-Improvement Contractor Bonds?
California requires home improvement contractors to post bonds as a mechanism to protect the public and ensure that contractors with state licenses have the requisite knowledge, skills, and competencies to perform their work. Since the surety submits bond applications to underwriters to evaluate the contractor and the business before issuing a bond, a bonded contractor has been pre-qualified and found to have a stable business and pose relatively little risk.
Surety bonds protect homeowners from potential illegal conduct committed by a contractor during a remodeling project. This type of misconduct could cause damage to the homeowner’s property and could cause substantial losses. Requiring a contractor license bond provides some assurance to homeowners that their homes will be protected in case something goes wrong.
The bond requirement also helps the state to screen out unqualified contractors. Those who are unable to secure bonds can’t obtain licenses, preventing them from lawfully operating their businesses in the state. Since both a contractor’s license and bond must be renewed, the bond requirement also allows the state to identify contractors who can’t get bond renewals because of bond violations and deny their renewal applications.
How to Get a Home Improvement Contractor Bond in California
Getting a home improvement contractor bond in California does not mean that you will have to purchase a bond by paying $25,000. Instead, your bond cost will be a percentage of the bond’s penal sum instead of the full posted amount.
To get a contractor license bond, you can apply through a surety company. Many offer online applications to simplify the process. You might have to submit some additional documents about you and your business so that the surety company can properly evaluate your application.
During underwriting, the surety underwriters will consider several factors to evaluate the risk the company might face if it issues a bond to you, including your personal and business credit, the stability of your company, your available working capital and assets, and the reputation you have with others in the industry. If you have excellent credit, your bond quote could be as low as 1% of the maximum bond amount. For a $25,000 bond, this means you could pay as little as $250 to secure a bond with excellent credit.
If your credit is poor, your application could be denied. If it is approved, you might be required to pay 10% or more to purchase your bond. This could mean paying $2,500 to secure a bad credit bond.
Once you pay the bond premium to secure your bond, you will receive a bond certificate and some bond forms. Once you sign the bond, the certificate will need to be submitted to the CSLB together with your application to obtain your B-2 residential remodeling contractor’s license.
While the bond requirement for home improvement contractors in California might feel like one more expense you have to pay to engage in business, being bonded makes you more attractive to homeowners. It’s also illegal to perform remodeling work in the state without a license, and you must post a bond to get your license. After securing your bond and license, make sure to follow the law and complete your contracts to remain in good standing.
We’re GreatBuildz, a free service here to help you find the best remodeling contractor for your home project. Get your project started with our team by calling (818.317.3567) or visiting our website.