What is a Bid Bond? Bid bonds guarantee compensation to the bond owner if the bidder fails to start a project. They are often used in construction jobs or similar bid-based selection processes.
Function of Bid Bond: It provides a guarantee to the project owner that the bidder will complete the work if selected. The existence of a bid bond assures the owner that the bidder has the financial means to accept the job at the quoted price. Key Takeaways: A bid bond is a legal agreement ensuring contractors fulfill project obligations. It provides financial and legal recourse to the project owner. Bid bonds are usually submitted with the project’s contract and are backed by surety companies. Other Types of Construction Bonds: The main types of construction bonds include performance and payment bonds. Understanding Bid Bonds: Bid bonds ensure contractors comply with bid contracts and fulfill job responsibilities at agreed prices. Most public construction contracts require contractors or subcontractors to secure bids with bonds for legal and financial protection. Without bid bonds, project owners can’t guarantee proper job completion. Bid bonds also help avoid frivolous bids and save time in contractor selection. Requirements for Bid Bonds: Most project owners typically require 5% to 10% of the tender price upfront as a penalty sum. Federally funded projects require 20% of the bid. The cost of the bond depends on factors like project jurisdiction, bid amount, and contractual terms. For example, a contractor bidding $250,000 for an elementary school roofing job may need to submit a $50,000 bid bond for a federal contract. Writing a Bid Bond: A bid bond can be a written guarantee by a third-party guarantor submitted to the client or project owner. It affirms the contractor has the necessary funds for the project. Typically, contractors submit bid bonds as cash deposits. A contractor purchases a bid bond from a surety after extensive financial and background checks. Factors determining if a contractor gets a bid bond include credit history, years of experience, and financial statements. Parties Involved: A surety bond involves three primary players: the financial guarantor or surety of a construction bond, guaranteeing the obligee that the contractor (called the principal) will act according to the bond terms.The obligee, who is the owner of the project and hires the contractor, requests the bond. This person or entity sets the terms and conditions of the bond and will file a claim if the contractor fails to perform or violates the contract. The principal is the contractor purchasing the bond. In case of non-performance, they will be liable as per the contract and bond terms and conditions. Surety companies evaluate the financial merits of the principal builder and charge a premium based on the calculated likelihood of an adverse event. Both the surety and contractor are liable if the contractor fails to abide by any contract conditions. Bid Bonds vs. Performance Bonds: When a bid is accepted and the contractor starts working on the project, the bid bond is replaced by a performance bond. A performance bond protects the client from a contractor’s failure to perform according to contractual terms. If the work is poor or defective, the project owner can claim against the performance bond for the cost of redoing or correcting the job. Failure to Meet Obligations: If the contractor doesn’t meet bid bond obligations, both the contractor and surety are jointly and severally liable. A client usually opts for the lowest bidder for cost reduction. If a contractor wins the bid but doesn’t execute the contract, the client awards it to the second-lowest bidder and pays more. The project owner can claim against the bid bond. A bid bond is an indemnity bond protecting the client if the winning bidder fails to execute the contract or provide required performance bonds. Bid Bond Liability: The amount claimed against a bid bond typically covers the difference between the lowest and next lowest bid. The bonding company or surety may sue the contractor to recover costs depending on the bid bond terms. Frequently Asked Questions: What Is a Contract Bid? A contract bid is commonly associated with a proposal and price submitted by a contractor or service provider for a construction or renovation project business opportunity. Can You Get a Bid Bond with Poor Credit? Those with poor credit may still obtain bid bonds from companies, but they will often be more costly. Are Bid Bonds Returned? The bid bond amount is returned once the project is successfully completed per the contract. What are the 3 Major Types of Construction Bond? The three main types are bid, performance, and payment.