What is a bid bond?
A bid bond guarantees compensation to the bond owner if the bidder does not start a project. Bid bonds are often used for construction work or other projects with selection processes based on similar offers.
The function of the bid bond is to provide a guarantee to the project owner that the bidder will complete the work if selected. The existence of a bid bond gives the owner assurance that the bidder has the financial means to accept the work for the price stated in the bid.
Key points to remember
- A bid bond is a legal agreement that ensures that contractors meet their stated obligations on a project.
- This form of insurance provides both financial and legal recourse to the project owner.
- Bid bonds are usually presented in conjunction with the project contract.
- Bid bonds are guaranteed by specialized bonding companies that guarantee that payments will be made if the contractor does not meet his end of the bargain.
- The other main types of construction bonds are performance and payment bonds.
Understanding Bid Bonds
Bid bonds ensure that contractors can comply with bid contracts and will fulfill their professional responsibilities at agreed prices. Most public construction contracts require contractors or sub-contractors to guarantee their bids by providing bonds which serve as a means of legal and financial protection for the client.
Without bid bonds, project owners would have no way of guaranteeing that the bidder they select for a project will be able to complete the job properly. For example, an underfunded bidder may encounter cash flow issues along the way. Bid bonds also help clients avoid frivolous offers, which saves time in analyzing and choosing contractors.
Bid Bond Requirements
While most project owners typically charge 5-10% of the bid price as a penalty, federally funded projects require 20% of the bid. The cost of the bond depends on several factors, including the jurisdiction of the project works, the amount of the bid and the contractual conditions.
For example, a contractor who submits a bid of $ 250,000 to provide a roof for an elementary school will need to submit a bid bond of $ 50,000. This bid bond is required with a proposal to be taken seriously as a candidate for a federal contract.
Drafting of a bid bond
A bid bond may be a written guarantee established by a third party guarantor and given to a client or to a contracting authority. The bid bond certifies that the contractor has the necessary funds to carry out the project.
Typically, bid bonds are issued as a cash deposit by contractors for a bid. A contractor purchases a bond from a bond’s submission, which performs extensive financial and background checks on a contractor before approving the bond.
Several factors determine whether a contractor will receive a bid bond. They include the company’s credit history and the number of years of experience in the field. Financial statements can also be examined to determine the overall financial health of the business.
The parties involved
A surety involves three main actors: the financial guarantor or surety of a construction bond, guaranteeing the creditor that the contractor (called the principal) will act in accordance with the conditions established by the bond.
- The creditor is the owner of the project who engages the contractor and asks for the bond. This person or other entity sets the terms and conditions of the bond and will file a claim if the contractor fails to perform or breaches the contract.
- The main is the contractor who buys the deposit. If the contractor does not perform, he will be liable on the basis of the terms and conditions set out in the contract and the bond.
- Surety companies assess the financial merits of the prime builder and charge a premium based on its calculated probability of an adverse event occurring.
Both the surety and the contractor are liable if the contractor does not comply with any of the conditions of the contract.
Bidding bonds vs performance bonds
A bid bond is replaced by a performance bond when an offer is accepted and the contractor begins work on the project.
A performance bond protects a client against a contractor’s failure to perform in accordance with contractual conditions. If the work done by a contractor is poor or faulty, a project owner can make a performance bond claim. The bond provides compensation for the cost of redoing or correcting the work.
Non-compliance with obligations
If the contractor does not respect the obligations of the bid bond, the contractor and the surety are jointly and severally liable for the bond. A client will usually go for the lowest bidder as this will mean lower costs for the business.
If a contractor wins the bid but decides not to perform the contract for some reason, the client will be obligated to award the contract to the second lowest bidder and pay more. In this case, the contracting authority can claim the total or partial amount of the tender deposit. A bid bond is therefore an indemnity bond that protects a client if a successful bidder does not perform the contract or provide the required performance bonds.
Third party liability
The amount claimed against a bid bond usually covers the difference between the lowest bid and the next lowest bid. This difference will be paid by the surety or surety company, who can sue the contractor to recover the costs. Whether the surety can sue the contractor depends on the terms of the bid bond.
Frequently Asked Questions
What is a contract offer?
A contract offer is most often associated with a proposal and price submitted by a contractor or service provider to a solicitation firm for a business opportunity involving construction or renovation projects.
Can you get a bid bond with low credit?
While it is always helpful to have good credit in business like these, those with bad credit can still get bid bonds from companies that agree to do so, but these will often be more. expensive to obtain.
Are bid bonds returned?
Once a project is successfully completed in accordance with the contract, the amount of the bid bond is returned.
What are the 3 main types of construction bonds?
The three main types of construction bonds are offer, performance and payment.