Bid Bonds and Surety Bonds
What are Bid Bonds?
Requested by the owner at the tender stage, a Bid Bond, typically in the amount of 10% of the tender price, provides assurance to the project owner that the bid has been submitted in good faith. It implies that the bidder is not only qualified, but will take their tender seriously and enter into a contract at the price tendered. If a bid bond is required and you don’t include it with your tender, your bid will be rejected.
What if I Don’t Follow Through with my Bid?
If the contractor is awarded a job where a bid bond has been submitted and decides not to enter into the contract, the owner can make a claim against the full amount of the bid bond. It is a legal instrument, enforceable by law. The claim amount typically covers the difference in price between the first and second bidder. In the event of a claim, the bond company will look to the contractor for recovery of its loss under the indemnity agreement.
How Much Do Bid Bonds Cost?
Bid bonds and other tender bonds are all included in what is known as your “annual bond facility fee”. Whether you bid once, or fifty times, your annual administration fee will cover the cost of all your bid bonds. The fee can range, but typically it is anywhere between $1000 and $3000.
Other Tender Bonds
- Prequalification Letter – At the tender stage, a project owner may ask you for a prequalification letter. This letter from the bond company is requested in order to assess a contractors bonding capacity before they are added to a bidders list. It outlines your bonding capacity in terms of single job size limit and total bonding capacity available. Although a prequalification letter is a non-binding document, it is used to gauge the size of a contractor and whether or not they will be able to handle certain sized projects.
- Agreement to Bond – Also known as a “Consent of Surety”, the agreement to bond is a legal commitment, but is not a true bond as it is only executed by the bond company and not the contractor. It confirms to the project owner that should the contractor be awarded the job and enter into a contract, the surety will provide the performance and/or labour & material payment bonds as per the terms outlined in the Agreement to Bond. The agreement to bond generally accompanies the bid bond when submitting a bid for tender.
Bid Bonds and Performance Bonds Work Together
Bid Bonds are generally the first thing you need in order to bid on public jobs, as they guarantee the bids you submit are in good faith and that the surety company will issue the performance bonds required if you win the job. If you are awarded the job, you will likely be required to submit a performance bond with your signed contract.
Obtaining Bid Bonds
In order to obtain bid bonds for specific tenders, a contractor must establish what is known as a “Bond Facility”. A Bond Facility allows a contractor to bid on jobs that require bid bonds and tender bonds throughout the year. This Bond Facility is established with job size limits under which the bond company will supply the bonds required by the owner.
All Surety Bond Company’s use the same 3 Criteria to determine whether a contractor qualifies for Bid and Performance Bonds. These include:
- Character: Does the contractor have a good track record, good references and integrity?
- Capacity: Does the contractor have the skill, experience and knowledge necessary to perform the contract? Have they successfully completed projects of similar size and scope?
- Capital: Does the contractor have the net worth position and working capital necessary to complete the project and support the various other projects they are undertaking?
Basic Surety Bond underwriting requirements to assess these criteria are as follows:
- Good personal credit
- 3 years experience in this field
- Corporate financial statements meet a minimum financial threshold.
What information is required to submit an application for a bid bond?
- Complete and Sign the Contractors Questionnaire.
- Bond Request along with the contract documents.
- Most recent business financial statements.
- Current Personal Financial Statement.
Other Frequently Asked Questions
Over the years, we have noticed the same handful of questions being asked by our clients with respect to bid bonds. So, we thought we’d identify and answer the top 8 most frequently asked in a separate dedicated post.