When Are Bid Bonds Required
If the project proprietor requires it or if the task will use public funds, like a project that the government is working on to improve infrastructure, then a Bid Bond is necessary. This is true for all stages of government, from the most municipal to the most state to the most federal. If this is the case for the bid that you are interested in obtaining, then you are required to acquire a Bid Bond prior to submitting your proposal for the state or project that makes the requirement obligatory.
It is essential to keep in mind that, in contrast to other types of surety bonds, Bid Bonds do not cover anything other than the losses incurred by the project owner in the event that the contractor is unable to satisfy the commitment of the bid. The most effective way to think of a Bid Bond is as a risk-management instrument that conveys to the client that the contractor is capable of completing the work.
In essence, at the bidding stage, you will need to provide the offer collateral, which serves the purpose of securing your submission. After a contract has been awarded, a Performance Bond will be necessary in order to guarantee that the contract will be carried out as agreed.
A Bid Bond is a form of surety bond that guarantees a project owner that the construction company tendering on the project can and will complete the contract if awarded the contract. A Bid Bond is, by definition, a financial inducement for the winning respondent to provide an honest assessment of their ability to complete the project within the specified budget and timeframe. It also establishes a mechanism for a harmed party to recover damages if the successful bidder fails to accept the project.
After being awarded the project, the contractor will be required to obtain a Performance Bond, which will necessitate a qualification process in which their financial stability, capabilities, and dependability will be verified.
How It Works
If a pledged construction company obtains a project but does not complete the work, the project proprietor must select the next acceptable proposal. They can then submit a claim against the Bid Bond for the difference between the withdrawn winning bid and the second-place bid.
Typically, the surety investigates all claims exhaustively. However, since there is no doubt as to whether or not a bonded contractor withdrew from an awarded contract, the surety will pay out the full amount of this claim. After that, they will focus on collecting the debt from the principal.
By engaging into the agreement for the surety bond, the principal accepts financial responsibility for a successful proposal. Consequently, they are unable to rescind the proposal after it has been awarded without forfeiting the bid collateral.
The only method to avoid claims against Bid Bonds is to complete projects after obtaining a bid. It is also essential to note that claims against the Bid Bond can compromise the principal’s ability to obtain future bonds. Any funds paid out by the surety on a Bid Bond must be reimbursed by the bond principal.
Who Needs One
The proprietor of a construction project determines whether a Bid Bond is required. All public sector initiatives must be backed by a surety bond. When submitting a proposal for most sizable undertakings, a Bid Bond is required. Your proposal will never be considered for these endeavors without a surety bond.
Contractors working on minor projects (e.g., residential) are less likely to require bonds, but it is not unheard of. Realistically, any contractor may be required to provide a Bid Bond at some point (or multiple times) during their career. Therefore, it is prudent to be familiar with the process.
The Bond Amount
On average, the cost of a Bid Bond is very modest. They range in price from free to approximately $350. If the contract is granted, a Performance Bond will be necessary.
Usually, the cost of the Performance Bond is 1-5% of the bond’s face value. The lower your premium will be, the higher your credit score. The bond’s value, however, is determined by the project proprietor who requires it. Therefore, bond values can vary significantly based on the magnitude of the bonded contract.