A bid bond is used to solidify a deal made between a contractor and project manager. This type of bond helps to guarantee that the bid placed by the contractor is accurate and will then be followed by a performance bond.
Bid bonds are required by law for any type of federal project and are most common for construction projects and general contractors. Unlike a surety bond, which is often required in order to get a contractor’s license or to bid on a project, bid bonds are designed more to guarantee a project’s costs. Bid bonds do not provide any liability coverage or protection in the event of accidents or injuries.
How Do Bid Bonds Work?
The bid bond is submitted along with the project proposal to the individual that is requesting the bond. From there, the bid bond will be evaluated by the project manager, architects, and/or engineers to determine whether or not the bid is fitting for what the project is asking.
If the bid is inaccurate, underestimated, or not paid, or if the project is not completed based on the terms agreed upon by the two parties, then a bid claim may be filed. From there, the contractors would be punished accordingly. To avoid a bond claim, it is important to follow through with the contract. This includes paying the entire predetermined project costs, completing the project on time and up to par, and ensuring the bid that was submitted is correct on all accounts. It is important to avoid bond claims because not only do they damage the reputation of the contractor’s company, but they may also result in legal actions, fees, and even loss of customers.
The contractor will then submit a bid bond between 5% and 10% of the initial project cost. For example, if the project is an estimated $100,000, the contractor will need to pay $5,000 to $10,000. This is to help show the project manager that the bidder is serious about their bid, they’re financially stable to follow through with their bid, and they’re able to effectively complete the job to the project manager’s standards.
Essentially, bid bonds are created to effectively maintain the relationship between the contractor and project manager to help hold each side accountable. Throughout the bidding process, the contractors will assemble to create an estimate of how much they feel the project is worth and present that number (bid) to the project manager. From there, the project manager will sort through all of the bids and select the one they feel is best. The contractor with the best bid is the contractor that will end up completing the project.
Bid Bond Costs
The general cost of a bid bond charged by a provider is a flat $100 fee per contract. However, some bid bond providers may choose to waive or discount the fee — but this will vary with each bond provider.
Bid Bond vs Performance Bond
After a bid bond is set in place, it is followed by a performance bond. A performance bond, otherwise known as a contract bond, is a type of bond that is issued by a bank or insurance company and is used to guarantee the project is completed.
Performance bonds are set in place by the Miller Act and are implemented towards all federal and public projects that are valued at $100,000 or more. However, some private jobs conducted by general contractors may require performance bonds as well. It is important to verify with the general contractor prior to placing a bid bond to make sure a performance bond is/isn’t needed.
It is important to note that general contractors’ rules and regulations vary nationwide.
Creating a Bid Bond
To apply for/create a bid bond, the contractor can either write up the agreement themselves or hire a third party bonding company to underwrite the contract. They would then fill out a form and answer the following (or similar) questions:
- Bid amount;
- Date of the bid;
- Answer whether or not they have been bonded before;
- Provide information on how long their company has been around;
- Some may even request the bidder’s personal credit score.
Bidders will want to keep in mind that the larger the bid, the more information they may need to provide. For example, if the project is over $100,000 or more, a performance bond will be set in place — therefore bidders will need to provide the information required for a performance bond alongside a bid bond. If the projects are valued at $350,000 or more, the company’s worth, financial stability, and industry experience may be requested as well.
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