Bonding in Alabama

A surety bond is a 3-party promise. The contractor (the principal) pays a surety company for a bond that a customer, subcontractor, or a government entity (the obligee) can draw against if the contractor breaks the rules the bond covers. The surety pays valid claims up to the bond face value. The contractor then owes the surety for what the surety paid out. A bond protects the public. It is not insurance for the contractor. Alabama uses bonds in three places that contractors commonly confuse. Keep them separate. 1. HACR HVAC contractor performance bond. The Alabama Board of Heating, Air Conditioning & Refrigeration Contractors requires a $20,000 performance bond from each licensed HVAC or Refrigeration Contractor as a condition of the active license. The bond runs to the benefit of parties harmed by the licensee's violation of HACR rules. Source: HACR New License Application (https://hacr.alabama.gov/new-license-application/). 2. AECB and PGFB — no uniform state license bond. As of the current rules, the Alabama Electrical Contractors Board (AECB) and the Alabama Plumbers and Gas Fitters Examining Board (PGFB) do not impose a statewide uniform surety bond on every electrical or plumbing license. Local ordinances may require a city or county license bond. Verify the local rule before assuming you are bonded or unbonded. Source: AECB (https://aecb.alabama.gov/); PGFB (https://pgfb.alabama.gov/). 3. Public works payment and performance bonds (Little Miller Act, Ala. Code 39-1-1). Alabama's Little Miller Act (Ala. Code 39-1-1) requires a performance and payment bond on public works contracts exceeding $50,000. The performance bond runs to the governmental entity; the payment bond protects subcontractors, laborers, and suppliers. Published industry summaries note that the bond may be set at 50 percent of the contract amount under Alabama's rule. Subcontractors on a bonded public job perfect claims against the payment bond rather than lien public property. Verify the current threshold and bond percentage against the statute before assuming a job is bonded. Source: Ala. Code 39 (https://law.justia.com/codes/alabama/title-39/). Premium math. A surety charges an annual premium, typically 1 to 3 percent of the bond face value for a contractor with strong credit and no prior claims. Weaker credit, tax liens, prior surety losses, or a new business can push the rate to 5 to 10 percent or more. A $20,000 HACR performance bond at 2 percent is $400 per year. Public works payment and performance bonds are priced per job, usually 0.5 to 3 percent of the contract price. Bond, insurance, and workers' compensation are separate requirements. An Alabama contractor carries the $20,000 HACR bond (HVAC only), general liability insurance at limits required by the board or the project owner, and workers' compensation under Ala. Code 25-5 once the business has 5 or more employees.