Everything You Need To Know About A Bid Bond And How It Is Used

If you are a property owner or developer who is involved in a construction bidding process, you need a bid bond, also known as a construction bond, to protect yourself. A bid bond is designed to guarantee that all parties involved will respect the terms of the bid and that the owner will be compensated if those terms are violated. A surety agency, which acts like an insurance company in this situation, is where you can get a bid bond to ensure that the contractor has the resources needed to finance and complete the project. Any project that involves payment or performance bids generally requires bid bonds. To help you protect your interests, here’s everything you need to know about a bid bond and how it is used.

Basics of Bid Bonds

The obligee (the owner or developer of the construction project), the principal (the proposed contractor or the bidder), and the surety (the agency that provides the bid bond) are the three main parties involved in a bid bond. The principal is the one who purchases the bid bond from the surety agency for a set price. The penal sum is the total coverage value of a bid bond, which refers to the maximum amount of damages that the surety can cover. Typically, the total coverage value can range anywhere between 5 to 20% of the bid amount.

How They Work

Bid bonds exist mainly to prevent contractors from making trivial and ridiculously low bids in order to win a contract. Several contractors are asked to approximate the total job cost, and then present the bid or the estimated price. The contractor that offers the best bid is selected for the project. The team explains that a bid bond is needed, even if the contractor is highly recommended because it ensures that they will respect the terms of the bid after they sign the contract. If the contractor fails to abide by the terms or raises the price after you sign the contract, this means that the contract has been broken and you need to search for another contractor. In most cases, it is the next lowest bidder. The bid bond also covers the cost difference between the previous and current contractor; depending on the terms of the bond, your surety can sue the previous contractor to recover the costs.

The Cost of a Bid

Bids are premium payments, meaning they are pre-paid by the contractor to the surety, and their costs depend on several factors. The location and cost of the project, the owner, and the contractor’s financial history are just a few determinant factors that affect the cost of the bid. The cost of a bid is usually a fixed rate of $100 to $200 for small projects. However, for larger projects, the cost is determined by the bid’s penal sum, along with a percentage of the total project cost. Non-federal projects usually have a standard penal sum of 5 to 10% of the total project cost. For federal projects, the penal sum is capped at 20%. The premium of the bond, or the prepaid amount, ranges from 1 to 5% of the penal sum.

Requirements for Bid Bonds

The standard requirements of bid bonds follow the Miller Act. To start any federal project, all bidders are obligated to submit a bid bond. Many privately-owned firms also require bid bonds in order to protect themselves from potential risks. Surety bonds are also vital for a construction company to be recognized as a competitor in the industry. Surety bonds are also mandated to obtain permits and licenses in some areas. Generally speaking, if you are a  contractor, almost every single project developer or owner will require a bond before they allow you to make a bid. When it comes to a federal surety, you can meet bond requirements in more than one way. You can refer to a corporate surety agency for an issued surety bond, or you can refer to an individual surety that covers specific types of assets. These individuals can issue bonds if they have eligible assets in the right amounts to support the bonds.

As you can see, bid bonds act as a safety net when you are starting a construction project, especially if you are the obligee or the owner or developer of the project. Bid bonds will help protect you from any unethical acts and contract violations. Obtaining a bid bond is a relatively easy process, and the costs are relatively low if your project is small. In any case, it is wise to obtain a bid bond to protect your interests, regardless of the size of your project.

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