The Koreatown Bid That Changed Everything
A second-generation electrical contractor in East LA had built a solid $3M/year business doing tenant improvements and residential remodels across the metro. When a $6.2M LA Metro station electrical package came up for bid, the contractor saw an opportunity to break into public works — the kind of project that could transform the business.
The problem wasn't capability. The contractor had 18 years of experience, a clean CSLB record, and the crew to handle the scope. The problem was bonds. The bid required a 10% bid bond ($620,000), a 100% performance bond ($6.2M), and a 100% payment bond ($6.2M). The contractor's existing surety — a regional company that had written the $25,000 CSLB license bond for years — wouldn't underwrite anything above $1.5M single-project.
The contractor missed the bid deadline. The project went to a competitor with established bonding capacity. That's when the contractor called us.
We restructured the entire surety relationship. After reviewing three years of CPA-prepared financial statements, a detailed project experience resume, and the contractor's bank relationships, we placed the account with a national surety specializing in growing contractors. Within 60 days, the contractor had a $7.5M single-project bonding limit — and won the next Metro electrical package that came up for bid.
This scenario plays out constantly in Los Angeles. The LA construction market is one of the most bond-intensive in the country, and contractors who don't understand how to build their bonding program get locked out of the projects that would grow their business.
Understanding Contractor Bonds — They're Not Insurance
The most common misconception we encounter is contractors treating bonds like insurance. They're fundamentally different:
Insurance transfers risk from you to the insurance company. If a covered loss occurs, the insurer pays and doesn't ask for the money back.
Bonds are a three-party credit arrangement. The surety guarantees your performance to a third party (the project owner or obligee). If you fail to perform and the surety pays a claim, the surety comes back to you for reimbursement. You are personally liable for bond claims.
This distinction matters because bond claims affect your ability to get future bonds — and in a market like Los Angeles, where bonding is required for virtually every public works project and many private commercial jobs, losing your bonding capacity can effectively end your business.
The Four Bond Categories LA Contractors Need
1. CSLB License Bond ($25,000)
Every active California contractor license requires a $25,000 surety bond filed with the Contractors State License Board. This is non-negotiable — no bond, no license.
What it covers: The CSLB license bond protects consumers against contractor violations of the Business and Professions Code — failure to complete work, abandonment, willful departure from plans and specifications, and unlicensed activity.
What it costs: For contractors with good credit (700+ FICO), the annual premium is typically $100-$500 — less than 2% of the bond amount. Contractors with credit challenges pay 2-10% ($500-$2,500/year). We have programs for FICO scores as low as 500.
LA-specific note: The CSLB's Southern California enforcement unit is based in Norwalk and conducts more investigations in LA County than any other jurisdiction. LA leads the state in unlicensed activity complaints and bond claims. Maintaining your license bond without lapses is essential — a gap triggers CSLB investigation and appears permanently on your public license record.
2. Bid Bonds
Bid bonds guarantee that if you're awarded a contract, you'll enter into the agreement and provide the required performance and payment bonds. If you withdraw your bid or fail to execute the contract, the surety pays the difference between your bid and the next lowest bidder (up to the bond amount).
LA requirements:
- LA Metro: 10% bid bond on all projects over $5,000
- City of LA Bureau of Engineering: 10% bid bond
- LAUSD: 10% bid bond on construction contracts
- LA County Public Works: 10% bid bond
- Federal-aid projects: 5-10% depending on agency
What it costs: Bid bond premiums are typically included in the performance bond premium — most sureties provide bid bonds at no additional cost once your bonding program is established.
Critical mistake to avoid: Some contractors assume they can withdraw a low bid without consequences. On LA public works projects, bid withdrawal penalties are enforced. If you bid $4M on a Bureau of Engineering project, your bid bond is $400,000, and the next lowest bidder is $4.3M — you owe $300,000 if you withdraw. The surety pays the obligee and then pursues you for reimbursement.
3. Performance Bonds
Performance bonds guarantee you'll complete the project according to the contract specifications. If you default, the surety can either finance completion, hire a replacement contractor, or pay the bond amount to the project owner.
LA requirements:
- LA Metro: 100% of contract value
- City of LA public works: 100% of contract value
- Private commercial: Varies, typically 50-100%
- Studio/entertainment: Often 100% on projects over $5M
What it costs: Performance bond premiums are based on the contract value and your surety's assessment of your risk profile. Typical rates:
| Contract Value | Premium Rate | |---------------|-------------| | First $500K | 2.5-3.5% | | $500K-$2M | 1.5-2.5% | | $2M-$5M | 1.0-2.0% | | $5M-$10M | 0.75-1.5% | | Over $10M | 0.5-1.0% |
Rates decline as contract values increase. A $10M performance bond might cost $100,000-$150,000 — roughly 1-1.5% of contract value.
4. Payment Bonds
Payment bonds guarantee you'll pay your subcontractors, laborers, and material suppliers. In California, the payment bond also protects against mechanics' lien claims — a critical function in LA's complex multi-tier subcontracting environment.
LA-specific exposure: LA construction projects routinely involve 50-300+ subcontractors across multiple tiers. A missed payment to a second-tier subcontractor can trigger a mechanics' lien, a stop notice, and a payment bond claim simultaneously. California's prompt payment statute (Civil Code §8814) requires payment within 30 days of progress payment receipt — failure triggers penalty interest.
What it costs: Payment bond premiums are typically included with the performance bond — most sureties quote them together at a combined rate.
Building Your Bonding Capacity in the LA Market
The most strategic thing an LA contractor can do is systematically build bonding capacity. Here's how:
Financial Statement Preparation
Your surety evaluates your financial statements more carefully than your bank does. Key metrics:
- Working capital: Current assets minus current liabilities. Sureties want to see working capital equal to at least 10% of your largest single project. For a $5M project, that's $500K in working capital.
- Net worth: Total assets minus total liabilities. Your net worth generally determines your aggregate bonding limit — most sureties will bond 10-20x your net worth.
- Debt-to-equity ratio: Below 3:1 is comfortable for most sureties. LA contractors carrying heavy equipment debt should structure leases vs. purchases strategically.
CPA preparation matters. Reviewed or audited financial statements carry more weight than compiled statements. For bonding programs over $1M, most sureties require CPA-reviewed financials. Over $5M, audited statements are typical.
Project Experience Documentation
Sureties want to see that you've successfully completed projects similar in scope, complexity, and value to what you're bidding. Document:
- Completed project list with contract values, timelines, and project types
- Owner references (especially repeat clients)
- Change order history (demonstrating you manage scope changes professionally)
- Safety record (EMR, OSHA citations)
Bank Relationships
Your banking relationship signals financial stability to sureties. A contractor with a $500K line of credit at a major bank demonstrates access to working capital that supports larger bonding. Some sureties require a bank letter as part of the underwriting package.
LA-Specific Bonding Challenges
Subdivision and Grading Bonds
LA County requires subdivision improvement bonds for tract development — typically 100-150% of the estimated improvement costs. These bonds guarantee that streets, sidewalks, utilities, and drainage improvements will be completed.
Grading bonds cover site restoration if grading work is abandoned. The city's hillside grading ordinance (ZI-1966) imposes additional bonding for slopes exceeding 2:1. This affects construction in the Hollywood Hills, Pacific Palisades, Bel Air, and other hillside communities heavily.
Cost consideration: Subdivision bonds tie up bonding capacity that could otherwise be used for project bonds. A $2M subdivision improvement bond reduces your available capacity by $2M. We help contractors structure their bonding program to maintain capacity for both subdivision and project bonds.
Disciplinary Bonds
If the CSLB takes disciplinary action against your license — consumer complaints, workmanship disputes, or licensing violations — you may be required to post a disciplinary bond ranging from $15,000 to $150,000 in addition to your standard $25,000 license bond.
LA County's high complaint volume means more disciplinary actions. We access specialty surety markets for disciplinary bonds, including programs for contractors with challenging histories.
Encroachment and Restoration Bonds
Work affecting public rights-of-way in Los Angeles — sidewalk replacement, utility trenching, street cuts — requires encroachment bonds. The City of LA Bureau of Street Services sets bond amounts based on the scope of work and the restoration requirements.
The Bond Application Process
Timeline: For established contractors with clean records and current financial statements, we can often secure bonds within 3-5 business days. CSLB license bonds can be issued same-day. Complex risks or first-time bonding programs may take 2-3 weeks.
What you'll need:
- Three years of CPA-prepared financial statements
- Personal financial statement for all owners with 10%+ ownership
- Completed project list with references
- Current work-in-progress schedule
- Bank reference letter
- Organizational documents (articles, operating agreement)
- Copy of CSLB license
Common Bonding Mistakes LA Contractors Make
1. Waiting until bid day to establish bonding. By the time you see a project you want to bid, it's too late to establish a surety relationship. Build your bonding program 6-12 months before you need it.
2. Using the cheapest surety for your license bond. Your CSLB license bond surety may not be able to write project bonds. Starting with a surety that can grow with you — from license bonds to $10M+ performance bonds — saves time and builds a relationship that supports capacity increases.
3. Hiding financial problems from your surety. Sureties are partners, not adversaries. If you're having a cash flow issue on a project, tell your surety before it becomes a claim. Sureties work with contractors through difficulties — but only if they know about them early.
4. Not planning for bonding capacity growth. Every financial decision you make affects your bonding capacity. Equipment purchases, lines of credit, owner distributions, and project selection all impact the metrics sureties evaluate. We help contractors make financial decisions that systematically build capacity.
Getting Started
Whether you need a $25,000 CSLB license bond or bonding capacity for $50M+ public works projects, we structure surety programs specifically for the Los Angeles market. Our surety relationships include national carriers that specialize in growing contractors from their first bid bond through major public works programs.
Call (949) 200-7171 or request a quote online. Same-day CSLB license bonds are available for qualified contractors.