California Public Works Bonds: Payment Bonds, Bid Security and Stop Payment Notices

Civil Code §9554 sets the content. The bond must be at least 100 percent of the total amount payable under the contract, it must be a bond rather than a deposit in lieu of a bond and it must be executed by an admitted surety insurer. It must promise that the surety will pay if the direct contractor or a subcontractor fails to pay three groups: authorized claimants, Unemployment Insurance Code amounts due for work on the contract and wage withholdings owed to the Employment Development Department.

Who can claim is set by §9100: a person that provides work authorized by a direct contractor, subcontractor, architect, project manager or other person in charge of the work; a laborer; and certain persons described in Public Contract Code §4107.7. The direct contractor itself cannot give a stop payment notice or claim on the bond. Section 9566 adds that a claimant recovers only if it provided work to the direct contractor, directly or through one or more subcontractors.

Under §9564, a claimant may sue the surety whether or not it also served a stop payment notice, and without suing the agency. The court awards the prevailing party a reasonable attorney's fee, so a disputed claim carries fee exposure in both directions. Section 9554 also lets the direct contractor require a subcontractor to give a bond indemnifying the direct contractor against loss caused by the subcontractor's default under that section.

Civil Code §9300 makes preliminary notice a condition of both remedies. A claimant gives it to the public entity and to the direct contractor it works under before serving a stop payment notice or claiming on the bond, although laborers and claimants with a direct contract with the direct contractor are exempt. Under §9303, the notice describes the work and estimates its total price. On work built by the Department of General Services, §9302 sends the notice to the disbursing officer of the department constructing the work.

Timing is where claims are lost. Section 9304 allows a stop payment notice or bond claim only for work provided within 20 days before the preliminary notice and at any time after. A supplier that starts deliveries in March and sends its notice in May has given up the early deliveries under both remedies, even if its invoices are otherwise valid. Section 9306 adds a license consequence: a licensed subcontractor whose subcontract pays more than $400 and that fails to give the notice faces grounds for discipline under the Contractors' State License Law.

There is a narrow fallback for the bond only. Under §9560, a claimant that did not give preliminary notice may still enforce a bond claim by written notice to the surety and the bond principal within 15 days after a notice of completion is recorded, or within 75 days after completion if none is recorded. For a second-tier claimant, the fallback closes when the first-tier subcontractor it supplied has received all progress payments other than amounts disputed in good faith. The fallback does not help a stop payment notice, which still requires preliminary notice under §9300.

A stop payment notice reaches contract money, not the bond. Under §9352 it must be signed and verified by the claimant, describe the work and claim only amounts due through the date of the notice. Section 9354 sends a notice on a state contract to the director of the department that awarded it; on other public work it goes to the controller, auditor or other disbursing officer, or to the body that awarded the contract. On receipt, §9358 requires the agency to withhold enough of the money due the direct contractor to pay the claim and the agency's reasonable cost of litigation.

Deadlines run from completion. Under §9200, completion occurs at acceptance by the public entity or after labor stops for a continuous 60 days, although the 60-day rule does not apply to State Contract Act contracts. The agency may record a notice of completion within 15 days after completion under §9204. A stop payment notice is effective only if given within 30 days after a notice of completion, acceptance or cessation is recorded, or within 90 days after cessation or completion if none is recorded (§9356).

The claimant then sues the agency and the direct contractor any time after 10 days from giving the notice and no later than 90 days after the notice period expires; if it misses that date, the notice lapses and the agency releases the funds (§9502). An agency must tell the claimant when the suit window closes within 10 days after completion or recordation, but only if the claimant paid it $10 with the notice (§9362). Bond suits run longer: §9558 allows suit up to six months after the stop payment notice period ends.

Once litigation costs are added, a stop payment notice can freeze more than the claim itself, and the direct contractor carries the cash gap. Section 9364 lets the agency, at its discretion, accept a release bond from the direct contractor. The bond must come from an admitted surety insurer, equal 125 percent of the claim and secure payment of whatever the claimant recovers, plus court costs if the claimant prevails. Once the agency receives it, the agency may not withhold funds under that notice.

For surety planning, a release bond is a new obligation written on the contractor's credit, and its surety is jointly and severally liable with the payment bond surety on the same claim. Sureties typically ask why the contractor disputes the claim, what the first-tier subcontractor was paid and whether a joint check or lien release would have prevented it. Contractors that log preliminary notices as they arrive can often see a stop notice coming before it is served.

Bid security comes from the agency's bidding section. City bids must carry cash, a cashier's check, a certified check or a bidder's bond from an admitted surety insurer under Public Contract Code §20170, and §20171 sets the amount at no less than 10 percent of the bid; a bid without it is not considered. County bids use the same four forms under §20129, which also bars the county from holding unsuccessful bidders' security beyond 60 days after award and requires the awarded contractor to execute a faithful performance bond approved by the board.

A low bidder that made a clerical error has a short window. Under §5103, relief from a bid requires proof that the bidder gave the public entity written notice within five working days after bid opening, detailing how the mistake occurred, and that the error was made in filling out the bid rather than in judgment or in reading the plans. Missing that window can leave the bid bond exposed if the bidder then declines the contract, so the surety should hear about a suspected bid error as soon as it is found.

Prime contractors can push bond requirements down, but only with notice. Public Contract Code §4108 lets a prime require a subcontractor to furnish performance and payment bonds from an admitted surety naming the prime as obligee, and to substitute another subcontractor under §4107 if the bonds are not furnished. The request for sub-bids must clearly state the bond amount and requirements. If the subcontractor is to pay for the bond, that must be stated too, or the prime cannot impose the requirement.

Retention shapes the surety's view of working capital, and California limits it. Public Contract Code §7201 caps retention withheld by a public entity from the original contractor, and by contractors from subcontractors, at 5 percent of each payment and of the contract price, unless the agency makes a substantially complex finding before bid in the way the section prescribes. A prime that gave notice under §4108 that bonds would be required may hold more from a subcontractor that is unable or refuses to furnish them.

Section 7107 requires the agency to release retention within 60 days after completion, with up to 150 percent of a disputed amount held back, and requires the original contractor to pay each subcontractor its share within seven days after receiving it. Improperly withheld retention draws a charge of 2 percent per month. Section 22300 requires bid and contract documents to let the contractor substitute securities for retained money. Eligible securities include certificates of deposit and standby letters of credit, and the contractor may instead ask that retentions be paid to an escrow agent.