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What is a Bid Bond

what is a bid bondA bid bond acts as insurance to protect the owner or developer in a construction bidding process and is required to bid on a contract. It’s a guarantee that the winning bidder will honor the contract and the terms of the bid. The bid bond is often received through a bank or insurance company, or a surety agency, and helps to support that the contractor is financially stable and indeed has the finances to take on the project.

A claim can be made against the bond if the contract is not fulfilled according to the bid. If the contractor decides to withdraw from the bid after the bid has opened, the bond further guarantees a claim can be filed against the bond in this instance as well. Although, if the contractor can prove that a mistake was made in their bid, there may be an exception.

A bid bond involves three parties:

 

  • The Obligee is the developer or project owner who requests the bond
  • The Principal is the contractor who purchases the bond
  • The Surety is an underwriter who issues the bid bond

 

Similar to a premium for an insurance policy, the principal will purchase the bid bond for a set price. The coverage value of the bond is called the penal sum and represents the maximum amount of damages the surety will cover with the bond. Penal sums are determined by the obligee. The type of surety bond you require will also influence the penal sum.

Do I Need a Bid Bond?

If you’re an owner or developer in a construction bidding process, the answer is YES. They’re inexpensive, usually around $100, and they protect the owners and developers from low-bidding contractors that then fail to complete the job, or increases the price of the job once being awarded the contract.

All bidders are required to submit bid bonds on any federal project under the Miller Act, which is still the standard today. Private firms also adopt this requirement to protect themselves from risk during the bid process. In some areas, a surety bond is required to obtain licenses and permits. Most importantly, almost all project owners and developers require a bond from you before you can bid on their projects.

What is a Performance Bond?

Remember bid bonds serve as a security and a prequalification measure for a contractor’s bid during a bidding process. A performance bond is a surety bond issued to contractors, that guarantees their performance in accordance with the conditions of their contract. A payment bond is a surety bond by a contractor to guarantee that its subcontractors and material suppliers on the project will be paid. All are specific contract surety bonds. The difference is in what each bond guarantees.

How do you Secure a Bid Bond?

To apply you will need:

  • The amount of your bid
  • The date of the bid
  • Your bonding history
  • Company history
  • Your credit score

When a surety provides you with a bid bond, they agree to provide a performance bond in the event that your bid is accepted. Bidding on projects above $250,000, you will need to provide other financial information as well.

Will I Lose my Bid Bond?

If you withdraw your project bid before the obligee opens the bid, then you will not have lost the bid security. But when the bidding has closed and the contract has been awarded, withdrawing the bid could mean losing your bid security. Bid security is an amount of money that may be calculated as a percentage of the budget estimate of an acquisition requirement or a percentage of a bidder’s bid price. It gives some assurance that the selected bidder will sign the contract or otherwise forfeit their bid security. In some cases, the project owners may allow a bid to be revoked if they don’t find it objectionable. The construction industry is a highly competitive market so treat bid bonds as the first step in the process.

What is a Bid Bond and How to Get One Today

Request your bond today by filling out this form! Our forms are extremely easy to use and completely secure. You will be asked to submit additional documentation about the contract you will be bidding on.

If you have any questions, feel free to contact us at (866)430-3322 and speak to one of our specialists. We’re happy to help you obtain more information about bid bonds and to share some advice or guidance.

April 11th, 2019
SurePlace