Hurry and Wait: Bid Bond Requests Arising from a Delayed Award
Claims on contractors’ bid bonds are a risk to be prepared for now more than ever. Bid bonds protect owners against the cost of re-bidding a project if the lowest bidder does not accept the contract. But what if the owner’s delays in selecting a contractor are the catalyst for the claim?
Why are project promoters delayed?
As project owners grapple with staffing shortages, the impacts of working from home, and other challenges, significant time can elapse between the submission of a bid and the owner’s awarding of the contract. The problem is that when an award is delayed, the contractor’s situation may change. Their backlog may increase, material costs and lead times may change significantly, and labor may be shifted to other tasks. In these cases, the contractor may determine that it is no longer possible or economical to perform the contract as originally offered. A contractor refusing the contract will likely cause the project owner to assert a bid bond claim.
How much could it cost?
Understanding the mechanics of the bid bond and the claims process from the outset helps the entrepreneur calculate their exposure and make a business decision on how best to proceed.
- The amount of the bid bond is a specific percentage (usually five to ten percent) of the bid amount and represents the maximum amount the owner can recover if the contractor refuses the contract.
- Generally, assuming the claim is valid, the amount owed to the owner is the lesser of the amount of the bond or the difference between the contractor’s lowest bid and the second lowest bid.
What are the lowest bidder options?
After evaluating the bid gap, the amount of the bond and its expected costs to perform the work, the contractor may decide to pay the owner the amount it would otherwise be entitled to recover under the bond, to absorb the increase in costs and pursue the contract, or try to negotiate an alternative solution with the owner.
How does bail help?
As part of the surety’s independent investigation of a bid bond application, the surety will work with the contractor to review the bid solicitation, bid instructions, applicable law, specific bond terms, the bid gap and the bid itself. In certain circumstances, the Owner’s failure to award the Contract in a timely manner will release the Contractor from its obligation to accept the Contract or the Bond from its obligation under the Bond. The bond could also help the contractor to negotiate a practical solution with the owner. Regardless of the circumstances, open communication between the contractor and their surety can help the contractor make the right business decision and limit their exposure.
Contract language can help
To reduce the likelihood of a bid bond being requested, the contractor should consider negotiating the wording of the bid bond with the owner at the outset to compel the prompt issuance of an award or incorporating wording in their proposal. to protect against price increases in the event of a delay. in the price. The Entrepreneur Bond is an excellent resource to help the entrepreneur develop appropriate language to achieve entrepreneur goals and mitigate the risk of exposure to the entrepreneur.