Contractors State License Board Beefs up Public Works Unit

From Garret Murai at CA construction law blog: an article on the state license board.

He writes about how California has increased its compliance staff at the public works unit so that they can make sure that contractors are in compliance with wage laws and workers’ compensation laws.  California has had a record year on its wage enforcement actions.  So be careful.

Contractors State License Board Beefs Up Public Works Unit by Garret Murai

The California Contractors State License Board (“CSLB”) has announced that it’s beefing up its Public Works Unit to help ensure that contractors bidding and performing work on public works projects are complying with wage and worker’s compensation laws.

The CSLB’s worker-focused expansion follows the California Labor Commissioner’s record-breaking prevailing wage enforcement actionsthis year.

And if recently enacted legislation is any indication, labor law will continue to be a hot topic this coming year.

Be careful out there.

Public Works Unit Expands to Ensure Contract Compliance

Staff has been added to CSLB’s Public Works Unit to ensure that contractors who bid on or participate in public works projects aren’t dragging past violations into a new, publically financed work setting.

The Unit’s Enforcement Representatives each focus on specific state regions. The larger team is working with awarding agencies to prequalify project bidders, disclose public works violations imposed by other state agencies on CSLB’s website, and identify those who have committed serious offenses potentially subject to CSLB disciplinary action.

The Public Works Unit is focusing on:

Civil Wage and Penalty Assessments – These judgments can be imposed against a prime contractor and subcontractor for nonpayment of employee prevailing wages, overtime, travel, etc. by the state Department of Industrial Relation’ Division of Labor Standards Enforcement (DLSE). CSLB has the power to suspend contractor licenses to compel payment, although some prime contractors work in good faith with DLSE to resolve unpaid debts to employees. Civil Wage and Penalty Assessments that become final orders also can be used by CSLB to impose formal discipline on the offending contractor for Labor Code violations(s).

Verifying Leads on Public Works Projects – Public Works Unit staff verify that licensees on public works contracts obtain and maintain worker’ compensation insurance for employees. CSLB staff often finds that contractors have a workers’ compensation exemption on file with CSLB but have employees performing work on public projects. In cases of discrepancy, CSLB investigators call the contractor to advise that a violation ofBusiness and Professions Code §7125.4 is suspected. Contractors are given 10 days to comply with the law and a follow-up letter is sent. So far, the unit has achieved 100 percent compliance.

Red Flags – The unit is on the alert for contractors who violate the Labor Code and later try to escape their debts, including unpaid wages to employees. Investigators will red-flag cases where corporate officers discharge the debts under one corporation, and then try to prevent these officers from obtaining another license using a new business name. On a related note, investigators also are taking action against those who fail to disclose unpaid liabilities on license applications.

Contractors State License Board Beefs up Public Works Unit

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Don't bet your buisness! Ten things every contractor should know about surety bonds (#1)

It’s unfortunate, but we regularly work with construction companies that have unintentionally bet their business.  They do this by taking on risk where they didn’t expect.  We work together to develop a plan to manage or mitigate risk on construction projects.  This is done by a risk assessment as well as determining the most fiscally responsible option that ensures timely project completion, which is critical to a successful project – and a sound business.  Instead of betting on a contractor (or subcontractor) who does not have the requisite level of commitment or financial stability creates risk because they could easily become bankrupt part way into the job – or not pay their subcontractors.  Either way, the effects can be devastating to your bottom line. A common solution is surety bonds as they offer a great solution – providing financial security and construction assurance.  The surety bonds provide assurance to the project owners that all contractors will perform the work and pay specified subcontractors, laborers, and material suppliers.

The top ten things to know about surety bonds:

1. A surety bond is a three-party agreement where the surety company assures the owner (called the obligee) that the contractor (or principal) will perform according to the terms of the contract.  Many times, these are known as contract surety bonds.

Don't bet your buisness! Ten things every contractor should know about surety bonds (#1)

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What is a Bond Party?

Well, let me first tell you what is NOT a bond party.  Or at least what is NOT a bond party in the surety bond industry.  It’s not a gathering of people who dress up like a famous English spy, such as those found here: www.bondparties.com and here: http://pinterest.com/agoonie/james-bond-party/ and here: http://www.beenviedentertaining.com/james-bond-party.

Although sometimes I wish we were more like that.

Instead, our stealthiness is limited to a contract.  You see, a surety bond is a contract among at least three parties:

1. The obligee - the party who is the recipient of an obligation,


2. The principal - the primary party who will be performing the contractual obligation, and


3. The surety - who assures the obligee that the principal can perform the task

So, there are typically three entities that are considered a Bond Party: the Obligee, the Principal, and the Surety.

The surety pays out compensation to the limit of its guarantee in the event of the default of the Principal to uphold his obligations to the Obligee.

Through a surety bond, the surety agrees to uphold — for the benefit of the obligee — the contractual promises (obligations) made by the principal if the principal fails to uphold its promises to the obligee. The surety bond contract is formed so as to induce the obligee to contract with the principal.  That is, it reduces the risk of the Obligee in case the Principal is unable to perform per the terms of the agreement.

The principal pays a premium (usually annually) in exchange for the bonding company’s financial strength to extend credit in the form of a surety bond. In the event of a claim, the surety investigates and, if it turns out to be a valid claim, the surety pays it and then turns to the principal for reimbursement of the amount paid on the claim and any legal fees incurred.

What is a Bond Party?

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OK, SO WHAT EXACTLY IS A BONDING COMPANY?

As the leader in providing surety bonds (bid bonds, construction bonds, etc.), it is not uncommon that we get questions from people wanting to know exactly what a bonding company is, so we thought that we’d give you some information that could be worthwhile.

Bonding companies typically provide several lines of insurance, such as Errors & Omissions (E&O) insurance or Property & Casualty insurance as well as bonds.

We are going to focus on the bond side of the business as this is what the bonding company is all around. A bond’s formal name is surety bond.  It is written by an insurance coverage company via an insurance coverage firm.  Swiftbonds, as you’ve probably already guessed is a bonding insurance coverage agency. Just like all insurance coverage firms, there is a need for a certified insurance policy representative that helps the company.  We were selected to help service bonds by the insurance coverage company that underwrites the bond.

A surety bond is a contract among three separate parties: The principal (that’s you, the contractor), the obligee (the general contractor or agency), and the surety (the insurance company that makes certain that the principal’s commitments will be done).

Pursuant to this arrangement, the surety agrees to uphold the contractual assurances made by the principal if the primary obligor fails to uphold its guarantees to the obligee. In plain language, if you are unable to finish a job, the insurance company can either get someone else to finish or pay damages, etc.

The principal pays a premium for the bonding company’s financial stability in the form of a surety bond. If there happens to be claim and it turns out to be a legitimate claim, the surety will pay it and, after that, resort to the principal for repayment of the claim and any kind of lawful charges sustained.

Can anyone be a bonding broker/agent?

No. A bonding company will not contract with just anybody off the street.  A bonding agency is truly an insurance firm and should be staffed by accredited Insurance policy Agents. Bonding Companies are governed by the very same strict specifications as all insurance firms and follow state statutes established for insurance policy business.


OK, SO WHAT EXACTLY IS A BONDING COMPANY?

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About Surety Bonds

A surety bond is a particular type of bond that involves three different parties.  These are the principal (the entity being secured against default), the obligee (the entity who has the rights to the money or service owed), and the surety (the entity promising to shoulder the liability in case the principal defaults.

There is a wide range of circumstances or situations where this type of bond can be used.  Basically, a surety bond is used every time a group or an individual is expected to perform something, and an additional assurance of compliance is required.

How It Works

The principal signs an agreement with a surety company (normally an insurance underwriter or company like Swift Bonds) that makes a promise to reimburse the surety in case the obligee defaults or fails to pay.  In this case, the surety gives the obligee the agreed amount.  This then results to a legal obligation of the principal to reimburse the company.  This may include all expenses and losses incurred by the surety in relation to the case.

Since the insurer is a lender, it acquires the same rights in recovering its losses from the principal like what any lender has; and this is unlike a typical insurance transaction where an insurance company has significantly less options as far as legal recourse is concerned.

Types of Surety Bonds

There are many types of this bond including court bonds, contract bonds, license bonds, and bail bonds.  Swiftbonds does not write any court or bail bonds.  We focus solely on bonds for contractors.

Contract bonds – required of a contractor who is obliged to do a particular building or maintenance job. The contract may stipulate various specifications, timeframe for completion, and maximum cost, the surety may be required to appropriately fulfill the contract.

Court bonds – usually court-required prior to a principal’s attempts to file an injunction or claim, or an appeal. If the principal fails, they may be required by the court to shoulder the court costs or even a fine in case of wrongful filing.

Bail bonds – This is one of the most popular types of surety bond, although one that a lot of banks and insurance companies want nothing to do with primarily because of its notoriously high default rate. This basically requires the principal’s appearance at a set court date, and usually costs higher since only a few specialists are willing to issue such a bond.

License bonds – usually required for start up businesses or when acquiring a new kind of license for an already existing business.  In this case, the principal is the owner getting a surety for compliance with all the licensing requirements.  The local government or the state is the obligee issuing the license, and gets paid in case the principal does not act in accordance with the licensing requirements.

There are other types of surety bonds other than those mentioned above.  These include permit bonds (similar to license bonds), public official bonds (to make sure that the elected or appointed official will act lawfully), and probate bonds (for executors handling the assets of a minor or an estate).

About Surety Bonds

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Surety Bond for Contractors

A contractor’s surety bond is an agreement between the contractor, client and a surety issuing company.  The contractor is also referred to as the bond principal, while the customer is referred to as the obligee.  In most states, the contractor is required to be bonded before a license can be issued.  Big projects normally require a specific bond that covers only that particular project.

Functions of the Bond

A surety bond for contractors offers a financial assurance that the contractor will do the job correctly and in a timely manner. In case the contractor fails to make good on his obligations, the insurer will pay a pre-determined amount to the client.  The bond may also include reimbursements for damages to properties due to the fault or negligence of the contractor, unpaid materials suppliers or subcontractors, and stolen or lost materials.

Significance of the Bond

The bond helps in attracting clients as they are given more assurance on the contractor’s capability to finish the job.  This is important when you are dealing with a new client who is not sure about the contractor’s quality of work.  Suppliers and subcontractors may likewise prefer working with a bonded general contractor simply because there is assurance that they will receive their payments as stipulated in the contract.

Bond Amount

The amount of premium for a contractor’s surety bond is primarily based on the surety’s risk assessment and the bond’s payout amount.  The underwriter will analyze the history of contractors as far as relationships with owners, suppliers, subcontractors, architects, and engineers are concerned. The contractor’s current net worth is also considered in determining the bond’s failure risk probability.

A contractor who has a significant amount of assets under his name is more likely to finish a job compared to one who is struggling to even meet his monthly payroll requirements.  A bond amount is set depending on the available employees and equipment at the contractor’s disposal that are indicative of the company’s delivery potentials.

Important Considerations

When in need of surety bonds, contractors should shop around first as rates may vary between providers. Some companies offer higher limits that allow contractors to place bids for bigger projects. The surety company’s reputation and financial strength are also important. Clients and suppliers may sometimes be hesitant to work with contractors whose bonds are issued by unknown companies.

Filing a Claim

In general, contractor’s bonds require obligees to file pre-default notices in order to give the insurer an opportunity to avoid defaults. A meeting is initially scheduled between parties involved in the default such as the client, surety, contractor, and concerned suppliers and subcontractors. If it becomes apparent that the parties will not come to an agreement to complete the job, the surety may, at its discretion, decide to finish the task or bring in another contractor.

If it is merely a question of funding, the insurer may loan or advance the amount to the contractor so he can complete the job.  However, when default is inevitable, the surety company is required to pay out what is stipulated in the surety bond.

Surety Bond for Contractors

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What now for the Surety Bond Industry?

The Leaderboard Magazine recently contacted three industry experts, Ken Simonson, Lawrence LeClair and Lenore Marema (bios below) on the future of the surety bond industry.

Part I: What does the outcome of the election mean for the surety bond industry?
Simonson said the election was important because it did end one element of uncertainty. Now, we know who will be in the White House for the next four years and which parties will control the houses of Congress for at least the next two years. Beyond that, elements of uncertainty still remain.

LeClair said that while who controls what remains unchanged, there are some different faces in Congress and that could alter the outlook for some pieces of legislation that are important to the surety industry.

Marema said there will be a boost in construction in the Northeast as the area rebuilds after the destruction caused by Hurricane Sandy. In contrast, she said, the current federal highway bill maintains current levels of spending until Sept. 30, 2014, and no additional spending beyond those levels is expected in that time frame.
The immediate economic question, Marema said, is solving the problem of the financial cliff. Unless the lame duck Congress and President Obama act, the Bush era tax cuts will expire on Dec. 31, Marema said, and most Americans will get a tax increase. Around $109 billion in across-the-board cuts in domestic and defense spending in 2013, including $55 billion from defense, also will kick in under sequestration, she added.

“If Congress fails to act and lets the fiscal cliff happen, construction in the federal budget may well take a haircut like anything else,” Marema said. “The Republicans want to cut spending and entitlement programs to avert the fiscal cliff, and the Democrats want to raise taxes and other revenues. Any compromise likely will have some cuts in spending, and where that comes from is anyone’s guess.”
“There is not going to be money in the federal budget for any significant increase in construction. In addition, any new construction likely will have to be paid for in increased revenues or reduced spending elsewhere in the budget,” Marema said.

Ken Simonson is the Chief Economist for The Associated General Contractors of America in Arlington, Va.
Lawrence LeClair is Director of Government Relations for the National Association of Surety Bond Producers in Washington, D.C.

Lenore Marema is Vice President of Government Affairs for the Surety & Fidelity Association of America in Washington, D.C.

What now for the Surety Bond Industry?

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