What Is a Bid Bond vs Performance Bond
A bid bond is an assurance that the bid that you submit for a project (often public construction work) is correct and that you will post a performance bond for the project. A claim may be made against your bid bond, which you are obliged to pay if it is determined that your bid is erroneous or that you are unable to satisfy the duties that come with your bid.
The obligee is obligated to hire architects and engineers to review the bids submitted by various contractors, to schedule pre-bid meetings to go over project specifications with contractors who have indicated interest in the project, and to advertise the actual bid date in order to ensure that there are a sufficient number of contractors from whom to pick. In the event that you decide to back out of the project, the bid bond will guarantee that the obligee is not left high and dry.
Offers to bid that do not contain a proper bond are not going to be accepted. If you are chosen for the position, the client will often want you to post a performance bond before the work on the project can begin.
On the other hand, a performance bond is a specific kind of contract construction bond that serves as an assurance that a contractor will finish a project in accordance with the conditions stipulated in a contract by the project owner, who is also referred to as the obligee. The obligee may be a municipal, state, or local government, as well as the federal government or a private developer. Additionally, the obligee may also be the federal government.
One reason why these bonds are often needed for publicly funded projects is to verify that the hired contractors had the necessary financial and professional resources to successfully complete the projects for which they were awarded the contracts.
Surety bond businesses that are willing to bond a certain company for a project are, in essence, doing a competence evaluation of the contractor on behalf of the project owner to determine whether or not the contractor is capable of executing the stated project.
As a consequence of the Miller Act of 1934, a construction performance bond is needed on any construction projects that the federal government undertakes that cost more than $100,000. Before this, it was standard practice for contractors to purposely underbid for government contracts in order to be granted projects with the goal of not finishing the work unless the contract price was raised after the fact.
This was done with the hope that the government would not find out about the practice and take action against the contractors. As a result of the absence of bond penalties that may prevent this from happening, obligees were in effect held for ransom. Either they could pay the higher financial demand or they could dismiss the contractor and put the job up for bids again, but in either case, they would end up with the exact same issue with the new business. This problem can be solved using performance bonds.
In the event that a contractor (the principal) fails to fulfill their obligations as stipulated in the contract, the owner of the project (the obligee) has the right to file a claim against the contractor’s bond in an effort to recoup any monetary losses. In the event that a claim is shown to be legitimate, the surety is obligated to pay up to the full amount of the bond as compensation to the obligee on behalf of the principal.
It is essential for contractors to understand that performance bonds are fully indemnified. This means that in the case of a claim, the contractor is liable for repaying the surety the whole amount of the claim, in addition to any associated costs. After a claim has been filed against a project, the surety may, under certain circumstances, collaborate with the owner of the project to find a replacement contractor rather than pay out a financial settlement to the owner of the project.