Top 8 Questions About Bid Bonds
Over the years, we have noticed the same handful of questions being asked by our clients with respect to bid bonds. We thought we’d identify and answer the top 8 most frequently asked in the post below.
How much does a bid bond cost?
Bid bonds are required at the tender stage of a construction project. In addition to providing a prequalification service, they ensure your bid is submitted in good faith. These can be required in addition to other bonds called agreement to bonds and prequalification letters or letters of bond ability. Together these bonds are called tender bonds.
There isn’t a cost per tender bond issued as you might think. Instead, the annual administration fee associated with all bond facilities covers the cost of issuing tender bonds. This fee is charged once a year, and is typically $1500-$2500. Whether you use a bid bond once or 50 times in a 12 month period, the fee remains the same.
What is an “agreement to bond”?
Construction owners will often ask for an “agreement to bond” to accompany the bid bond at the tender stage. This document simply states that the bond company is willing to issue the requisite performance and labour and material bonds should the contractor be awarded the job. This document adds to the prequalification role that the bid bond plays as a bond company would not issue one without been comfortable with tender. An agreement to bond is sometimes referred to as a “consent to surety”.
How do I get a bid bond?
In order to obtain a bid bond for a tender, a contractor will first need what is called a bond facility. A bond facility outlines the terms and job size limits under which a bond company will issue bonds on your behalf. Once this facility is established, you would submit a request to your broker and provided it falls within your bond facility limits, they will issue your bid bond. It is important to note that qualification for a bond facility is an involved process subject to standard underwriting requirements.
Is there a limit on what I can bid on?
Yes, there are limits to what you can bid on when a bid bond is required. A Bond facility’s term sheet will outline the single job size and aggregate limits. The single job size limit is self-explanatory and caps the job size of which a bond company will provide support. The aggregate limit is the total remaining value of contracts on hand at any given point in time.
These limits depend on your company’s experience completing projects as well as the company’s financial strength. Working capital and tangible net worth are important ratios used to determine bond capacity. For a more detailed explanation of bond limits see our article on The Bond Facility’s Terms and Conditions Letter.
Why is a bid bond only 10% of the contract value?
The purpose of a bid bond is to provide assurance to the project owner that the bid was submitted in good faith. Should a contractor be awarded the contract and decide not to undertake the job, the project owner can then use the bond to cover the difference between the awarded and second lowest compliant bidder. With a value of 10% of the contract price, the bond is almost always sufficient in covering the difference between the two bidders.
The most widely used bid bond was created by the Canadian Construction Documents Committee, the most recent version being the CCDC 220 – 2002 bid bond which created the 10% standard. While most bid bond requirements call for a 10% bid bond they can vary from 5% to 15% of the tendered amount.
For a more complete explanation, please read our 10% bid bonds article.
How is a bid bond different from a performance bond?
There are a few key differences between a bid bond and a performance bond.
- The bid bond is required at the tender stage and is used to secure your bid. A performance bond is required after contract award and is used to guarantee the performance of the contract.
- The cost of bid bonds are covered by an annual administration fee and does not depend on the number issued whereas there is a cost for each and every performance bond issued.
- A bid bond can get called into question if you are awarded a contract and you choose not to enter into it, and a performance bond is used by a project owner if there is a default on a contract where a performance bond was provided.
Are bid bonds mandatory?
Project owners will specify their security requirements at the tender stage. If a bid bond is specified and a contractor fails to provide one with their submission, the owner can and typically will disqualify the bid and award the second-lowest compliant bid.
Although owners may accept alternative security such as a letter of credit, contractors will almost always use a bid bond due to its many advantages over a letter of credit, most notably its non-impact on cash flow.
Where can I get a bid bond?
Although bonds are issued by insurance companies, a contractor will need to go through an insurance broker. Due to the unique nature of bonding, it is highly recommended that you work with an insurance broker that specializes in surety bonds. With a large number of markets offering surety products, having an experienced surety broker can be the contributing factor in obtaining the bonding limits you require at preferred market rates.