Everything You Need to Know About Bid Bonds
What is a bid bond?
When a firm (usually a construction company) wants to submit a price for a project, the bid documents usually require that construction company to provide a bid bond with their submission. The bid bond guarantees that if the construction company submits a price that they will enter into a contract with the project owner.
What happens if I submit a bid bond and then don’t enter into a contract with the project owner?
If a contractor provides a bid bond, submits a price and then is awarded the contract but then refuses to enter into that contract, the project owner can claim against the bid bond. Most bid bonds indicate that the max amount a project owner can claim is either 10% of the tender price submitted by the contractor or the difference between the first and second bidder, whichever is less.
As an example, Contractor A submits a price for $100,000 and Contractor B submits a price for $105,000. When Contractor A is awarded they refuse to sign the contract with the project owner. The project owner would claim against the bid bond and in this case would collect the $5,000 difference between Contractor A and Contractor B.
If I refuse to enter into a contract after submitting a bid bond, what happens to my surety facility?
If a project owner makes a claim against a bid bond and pays this out, they can look to recover these funds from the construction company and its owners. Having a bond claim can certainly put strain on the relationship with your surety. Make sure you explain the reasons for backing out of the contract and ensuring any claim costs are mitigated are critical to maintaining a healthy relationship with your surety provider.
What is the cost of a bid bond?
Bid bonds are one of the bonds that are provided under a contractor’s surety bond facility. Under this facility, the contractor is charged an annual fee of roughly $2,500. This covers all the bid bonds, Surety’s Consent’s and pre-qualification letters required by a contractor within a 12 month period.
How do I secure a bid bond?
A good surety specialist construction broker will help you determine what is required to set up a surety facility and secure a bid bond. In general, you will be required to provide some information on your company and its history.
You will be required to provide financial information on the business as well as some financial information on the owners of the firm (assuming it is a private company). The surety is looking to make sure that you are capable and financially qualified to complete the projects you intend to submit pricing for.
How many bid bonds can I secure?
How many bid bonds your can secure depends on how much bond support that the you can qualify for. Based on the experience of the company, financial strength and your requirements, the surety will set the size of your bond facility and how many bid bonds you can have outstanding at any given time. There are generally maximum values of bid bonds that a surety will allow. Your surety broker can help guide you in understanding these metrics.
Is it important which surety company and surety broker I secure my bond from?
At the outset it often isn’t evident how important this decision is. Like anything else there is a range of different bonding companies which have differing appetites, understanding and skill sets related to surety bonds. Picking the right one is especially important if you intend grow, use more bonds or run into the inevitable ups and downs of the construction business. A good surety will listen and work with you through good times and bad.
The decision on your surety broker is equally important. Their access to markets, understanding of the construction business and involvement in trade associations are all important in ensuring they provide the right advice in good times and bad.