For people who want to work as contractors or subcontractors in the construction industry, it will be important to understand all of the legal requirements that apply. Contractors and subcontractors need to know the regulations and laws that apply to them and the contracts they enter into to avoid potential liability risks. While the regulations and laws have some slight variances from state to state, here is a general overview of what you need to know. 

Licensing and Bonding Requirements for Contractors and Subcontractors

Most states impose licensing and bonding requirements on contractors, and many also require subcontractors to secure licenses. A contractor license bond is a condition of obtaining a license in states that require licensure. License bonds are legal contracts involving the following parties: 

  • Principal - The contractor who is required to post bond
  • Obligee - The licensing authority that mandates the license, which is typically a governmental agency
  • Surety - The bond company that approves the principal's application and issues a bond as an assurance that the contractor will obey the law 

Instead of protecting a contractor against liability, a contractor license bond protects the obligee and the public against potential misconduct committed by the contractor. 

Contractors must sign indemnity agreements when they secure their bonds through which they agree to hold the sureties harmless if a claim is filed. An injured party can file a bond claim, and if it is validated, the bond company will pay it. However, the contractor will have to repay the surety in full for all amounts paid to satisfy the bond claim. 

Since a bond is a licensing condition, contractors can't legally work in states with licensing and bonding requirements without posting a bond and securing a license. If they do, they can face significant fines and other penalties and be forced to cease operations.

Other Bonds That Might Be Required

In addition to contractor license bonds, most contractors will encounter the following types of bonds in the course of business: 

  • Performance bond - A bond that might be required by a project owner to guarantee the contractor will perform their legal duties under the terms of the construction contract 
  • Bid bond - A bond that a public or private project owner might require as a condition for bidding that guarantees the winner will follow through on the contract at the bid-upon price 
  • Payment bond - A bond that might be required by public or private project owners that guarantees the contractor will pay the subcontractors and suppliers for their work to protect the project owners against potential mechanic's liens and ensure payment for subcontractors and suppliers 

Zoning Regulations and Building Codes

Before entering into a construction contract, it's important to know the local building codes and zoning regulations. Building codes cover how a building should be constructed. Deviations from these laws during the building process could open up contractors and subcontractors to potential lawsuits. Likewise, zoning regulations determine how the land can be used and what the permissible purposes are. Understanding the zoning rules for the project site is important before work begins in case the project owner might need to seek a variance. 

Permits and Approvals

Before the project begins, you must secure a zoning approval and permit. If the site is not zoned for the intended type of building or project, the project owner will need to seek a conditional use permit or a variance from the area zoning board before the project can start. Once zoning has been approved for the project, the contractor can then pull permits for the project to ensure everything complies with local laws. 

Insurance Requirements

Contractors and subcontractors need to ensure they have specific types of insurance that might be required by law or contract. These include workers' compensation insurance and commercial liability insurance. 

Workers' compensation insurance is a type of policy required under state law. Employers must carry this type of insurance to protect workers when they are injured on the job and can't take premium payments out of their employees' paychecks. If a worker is injured, they can file a claim for benefits to pay for their medical bills, lost wages and other economic losses. Many project owners require contractors to present proof that they have workers' compensation insurance to protect against potential liability if someone is hurt on the job. 

Commercial liability insurance is the second type of insurance that might be required. This type of insurance protects contractors from losses when other events occur that result in damages and losses. For example, a commercial liability insurance policy might protect against thefts, damage caused by natural disasters and other risks that could threaten a project. 

Importance of Contracts

Before entering into an agreement to perform work on a construction project, it's critical to have a written contract that outlines all of the work that will be performed in detail. Under contract law, the parties that enter into contracts must comply with the terms. If a contractor fails to abide by the provisions of a construction contract, the project owner can file a breach of contract claim in court against the contractor as well as a bond claim. 

When you are presented with a proposed contract, you should read through it thoroughly and ask for clarification of anything unclear. It's best to consult legal counsel to review a proposed contract and negotiate changes that might be needed to ensure it is fair. 

Construction contracts should be detailed and include each party that will be responsible for fulfilling various duties. The contract should include payment terms, including when payments will be made and at different stages of completion. It should also include provisions about how legal disputes will be handled. Many contractors and project owners agree to include arbitration clauses to resolve disputes outside of court at arbitration hearings because the process is much faster and less expensive than the litigation process. 

Since many different laws govern the construction industry, contractors need to familiarize themselves with the laws in their cities, counties and states. Because of the risks involved with construction, it might be wise to speak with a construction law attorney to understand your legal obligations. Ensuring you know the laws that apply can help you avoid potential bond claims and lawsuits and help you reduce your liability risks.