Bid Bond: How to Negotiate It – Construction and Planning
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The bid bond assures the employer that the bidder will sign the contract, if awarded, or comply with other specified obligations (such as issuing other bonds as provided for in the tender documentation). offers). They are quite common, especially in medium/large projects.
Of the many bonds normally used in construction contracts, the bid bond does not pose a great risk to the contractor/bidder provided he has carefully checked all conditions and tender documents and that he is genuinely willing to sign the contract and carry out the construction work. if the contract is awarded to him.
Bid bond is normally issued as a demand bond in a percentage between 1% and 5% of the contract value, but the percentage can even reach 10% of the contract value in some cases.
A. How it works
Generally, the Bid bond may be called upon by the Employer in the event the successful bidder fails to enter into the construction contract (if and when awarded) but may also be called upon in the event the successful bidder fails to comply with other obligations after contract award.
As is also the case with other bonds normally used in construction contracts (such as prepayment bond, performance bond or guarantee bond), the bid bond is normally issued in the form of a a sight bond (i.e. a bond which can be invoked by the Employer without it being necessary to demonstrate the default or actual breach of the Contractor and whose payment is made by the guarantor at the request of the Client).
The reason is quite simple being that with this type of bond, the Employer does not even need to take legal action to receive payment for the bond.
It goes without saying that when a bidding process is initiated, the Employer will incur costs for the bidding process itself and a demand bid bond assures the Employer that at least recover all costs incurred for the bidding process..
In such cases, the Employer will simply have to “declare” that the Contractor has breached certain obligations under the contract (or tender documents) and the surety will be required to pay without any objection.
It is therefore clear that the real risk here is not specific to the bid bond but rather to the form the bond will take (as said, if it is issued in the form of a demand guarantee).
The winning bidder will rarely have arguments or objections to prevent the guarantor from paying the bond, except in the case where the bond has been called in bad faith (or fraudulently) by the Employer (say for example that the Employer changes substantial terms of the contract after it has already been awarded to a contractor who, therefore, does not intend to sign the contract).
B. 5 tips to reduce risks for the entrepreneur
As an entrepreneur, there are a few tips that can reduce your risk of a scam call from Bid bond:
- CHECK that the events which entitle the Employer to call the suretyship are clearly identified in the text of the suretyship and are limited to the failure to sign the construction contract without reason;
- CHECK how the amount that can be called up is calculated, if it is not already fixed in the conditions of the call for tenders. In theory, in fact, the bid bond should only cover the actual costs incurred by the Employer to restart the bidding process or to select a second bidder. It is not uncommon, however, for the Employer to also seek to recover the difference between the price offered by the original contractor (who did not sign the contract) and the higher price offered by the new contractor;
- MAKE SURE that the
Bid bond will expire automatically (even in the event that the original document representing the bond is not returned to the Contractor) upon signature of the contract or, at the most, once the Contractor has issued the Performance Bond;
- CHECK whether the bid bond is in the form of a demand bond or a conditional bond and attempt to negotiate the issuance of a conditional bond;
- INSERT a clause, if the guarantee will be issued in the form of a bond on first demand, which obliges the Contracting Authority to clearly declare (when calling the bond) that the contractor has not signed the works of construction without a valid reason (this statement will be of the utmost importance in the event of a fraudulent call on the deposit).
The Bid bond is a fairly common guarantee in medium and large projects that guarantees a legitimate interest of the Employer and prevents the submission of offers from unqualified bidders or contractors who are not really willing to sign the contract and perform the works.
At the same time, if the bid bond is issued as a demand bond, it may be open to abuse by the employer who (acting in bad faith) may call the bond knowing that he has no right to obtain payment. .
A careful analysis of all the text can enable the contractor to minimize the risk of an unfair or fraudulent appeal of the bid bond.
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The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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