Bid bonds and Performance bonds
Understanding the differences between a bid bond and a performance bond is vital for anyone working in the construction business. This is because both bid bond and performance bond are necessary components of a successful construction project.
There are a number of important distinctions between the two that not only assist you in placing bids on projects but also have the potential to expand your contractor company if both bonds are managed well.
The bid bond serves as a guarantee that the contractor will accept the job and fulfill all of the requirements of the bid, including the provision of a performance bond to cover the contract, which in turn serves to protect the owner of the project.
This helps to avoid the chance of a situation in which a contractor backs out of a project in order to bid on other assignments at the same time or in order to purposefully underbid it. Specifically, this helps to eliminate the potential of a contractor underbidding a project.
On the other hand, a performance bond offers the owner of the project an assurance that the contractor will fulfill the tasks indicated in the contract in accordance with the terms and circumstances of the agreement. This kind of bond is sometimes referred to as a “performance guarantee.”
It operates in a manner similar to that of a bid bond in that it provides protection against losses in the event that the contractor does not meet their obligations and enters into default.
When a performance bond and a payment bond are issued together, not only will the performance bond guarantee that the work will be finished, but the payment bond will also ensure that the subcontractors and suppliers will be paid according to the terms of their subcontracts. This is because the performance bond and the payment bond are issued simultaneously.
Coverage
In the event that a contractor is unable to follow through on their bid, the bid bond does not cover anything in addition to the losses that are paid by the project owner.
In essence, it is a risk management tool that provides the owner of the project with the assurance that a contractor is qualified, that the contractor will enter into the contract if it is awarded to them, and that the contractor will provide the performance bond to guarantee that the project will be finished.
To put it another way, the performance bond protects the owner of the project from financial damage in the event that the contractor fails to finish the work as agreed upon or fulfill the responsibilities stipulated in the contract. This is because the performance bond is backed by an insurance company. In the case that the contractor is unable to complete the work, this comes in quite helpful. The payment is sent to the owner of the project by the surety company, which permits the construction activity to continue despite the oversight of a new contractor.
Required amount
Although bid bond and performance bond each cover a separate set of obligations, surety firms treat them the same when it comes to underwriting. This is due to the fact that bid bonds partially ensure that the surety will also offer the performance bond.
The required amount of the bond will determine how thoroughly surety businesses investigate the applicant’s background information. In general, sureties look for evidence that a contractor has previous experience working on works of a comparable scale and kind and that the contractor has the financial means necessary to finish the work.