A bid bond guarantees that a contractor will complete a job according to their initial bid. They are prevalent in the construction industry, and in almost all states, companies bidding on projects will have to secure a bond before they are permitted to work. However, there are more nuances to these bonds, which is the focus of this post.
A Bid Bond Is A Guarantee At Heart
A construction bid bond is a surety bond that ensures that the contractor will complete the work within the budget specified at the start of the job. This type of surety bond acts as a three-party guarantee. The principal, the obligee, and the surety are the parties involved. In most cases, the three parties include:
- The principal: The contractor who posts the bond
- The obligee: This is the party whose bond is due.
- The surety: These are the companies that provide the bonds.
In essence, a bid bond acts as a guarantee that the contractor will engage into a contract at the bid price if the obligee accepts the bid. In other words, it prevents a construction company from offering a lowball bid to squeeze out other companies and then increasing costs when work begins.
They Are Required For Federal Jobs
Construction bid bonds are required for federal construction projects. The federal government can only award contracts to contractors who have a surety bond in place. The surety company will ensure that the contractor fulfills their obligations under the contract to complete construction on time and within budget. They may also be required for specific state jobs at the discretion of state laws.
Costs Will Vary Depending On Your Bid
Bond amounts are generally calculated as percentages of the contractor’s bid amount, either 5%, 10%, or 20%. However, for smaller jobs they usually cost a flat fee. Therefore, there is no set price for a bid bond as it depends on the cost of the bid and the issuing company. Moreover, a bid bond guarantees the difference between the principal’s bid and the next highest bid. For a $100,000 bid, for example, if the second-place bidder bid $105,000, the maximum amount of the bid bond would be $5,000. In other words, costs can vary depending on the number of bids for a project and any fee that a bond company might charge to process the application.
They Are Underwritten Based On Various Criteria
Construction bid bonds are underwritten by a surety company that guarantees that the construction company will complete the project. In general, there are several criteria that companies follow when issuing a bond, including:
- Amount of the bid: As previously mentioned, the amount a construction company proposals will affect the cost of the bond and how much is covered.
- Credit history, personal and corporate: Bond prices will rise for companies with poor credit ratings. Both individual and corporate ratings can affect the amount.
- Assets, both personal and corporate: The number of assets you and your company own can affect the amount of your bond.
- Work in progress: The amount of work you have in progress and the quality of the work being performed can impact the overall cost of your bid bond.
- Prior work experience: You could run into issues if you had problems with previous projects. On the other hand, an exemplary work history could reduce the amount.
- Scope of the project: The size of the project you want to take on will also be considered when applying for this kind of bond.
Many Companies Offer Bid Bonds, But Not All Are Created Equally
Though many companies offer bid bonds, not all are created equal, and you should perform some due diligence before choosing one. Many factors go into choosing a good bid bond company. These include the company’s reputation, experience, customer service, and rates offered. Some companies are even preferred by the government themselves.
They Are Different From Other Types Of Bonds
A bid bond is just one of several other forms of bonds available for contractors. Others include:
- Performance bond: This bond guarantees that you will comply with all construction contract conditions and complete the job on time.
- Payment bond: This is a guarantee that you will pay your subcontractors and suppliers for the services or materials they provide.
- Maintenance bond: This guarantee ensures that the workmanship provided on a project will last.
You might need one or all of the others depending on the size of your company, the projects you undertake, and how sure you are that you can finish a job on time and within budget.
A bid bond does not guarantee that the lowest bidder will get the job, but it is an assurance that the bidder will honor their bid if they are chosen. The bid bond protects everyone involved and is highly beneficial for everyone involved.