What Is A Bid Bond and Why It Is Required
May 26, 2022 By Triston Martin

In case the successful bidder fails to start the project, the bond owner will be compensated. Construction projects and other endeavors involving competitive bidding frequently call for the usage of bid bonds.

The purpose of the bid bond is to ensure the project owner that the bidder will complete the work if selected. By having a bid bond, the owner may rest easy knowing that the bidder will be able to cover the cost of accepting their offer at that price.

Understanding Bid Bonds

Using bid bonds ensures that contractors can meet their contractual obligations and perform their duties at the agreed-upon prices. In most public construction contracts, contractors and subcontractors are required to secure their bids by providing legal and financial protection to the customer.

An underfunded bidder, for example, could run into cash flow issues during the bidding process. Aside from saving time in the selection process, bid bonds assist clients in avoiding unnecessary bids.

How Bid Bonds Work

Bid bonds discourage contractors from submitting cheap bids to win a contract based on shady practices. Construction bidding involves several contractors (principals), each offering an estimate of the project's total cost, which they then submit to the owner (the obligee) in the form of a proposal. The project is awarded to the contractor that comes out on top in the bidding process.

A bid bond is a promise from the winning bidder that they will uphold the conditions of the contract when it is signed. A breach of contract could occur, requiring the owner to find a new contractor and likely the lowest bidder if the contractor does not uphold the bid terms, such as by raising his price for the job after the contract has been signed.

If a contractor's first bid is lower than the next lowest bid, the owner is reimbursed for the difference in cost. Although this is contingent on the bond terms, these expenses can be recouped by suing the contractor.

Requirements for Bid Bonds

In contrast to most other project owners, federally supported projects need 20% of the bid price paid upfront as a penalty fee. According to various circumstances, including jurisdiction, bid amount, and contractual clauses, the cost of a bond can vary widely.

For example, a $250,000 bid for roofing at an elementary school will necessitate a $50,000 bid bond from the contractor. A proposal must include this bid bond to be viewed seriously as a contender for a government contract.

Writing a Bid Bond

Various bid bonds are written guarantees from third parties and submitted to the client or project owner. A bid bond is required to ensure the project is completed on time.

Contractors commonly submit bid bonds in a down payment to secure a tender. Comprehensive financial and background checks must be completed before a surety will approve a contractor's bid bond.

To get a bid bond, several requirements must be met. They look at things like the company's credit score and how long it's been in business. The company's financial accounts can also be analyzed to get a sense of the company's overall health.

Parties Involved

The financial guarantor or surety of a construction bond guarantees the obligee that the contractor (referred to as the principal) will perform according to the requirements stipulated by the bond.

  • The owner requests the bond of the project, who employs the contractor. If the contractor fails to meet the terms and conditions of the bond, this person or other organization will bring a claim against the contractor.
  • The contractor purchases the bond on behalf of the principal. Depending on the terms and conditions of the contract and bond, the contractor may be held accountable if they fail to meet their obligations.
  • There will be a premium charged by surety companies based on their estimate of how likely it is that an adverse event will occur.

Comparing Performance Bonds with Bid Bonds

When a bid is accepted, and the contractor begins work on the project, the bid bond is replaced with a performance bond.

When a contractor fails to meet the conditions of a contract, the client is protected by the contractor's performance bond. The project owner may invoke a contractor's performance bond in the event of subpar or defective work. The bond covers the costs of redoing or fixing the work.

Failure to Meet Obligations

It's a joint and multiple liabilities for the contractor and surety if the contractor fails to meet the bond terms. It is common for a customer to choose the lowest-priced bidder because it will save the organization money.

Contractors who win the bid but refuse to carry out the contract will be required to pay extra if the client awards the contract to someone else. The project owner has the option to sue the bid bond for the entire or partial sum owed. So-called "bid bonds" safeguard the client from a winning bidder who fails to fulfill their contractual obligations or produce their needed performance bonds.

Liability for Bid Bonds

The difference between the lowest and the next-lowest bidder usually is covered by the amount claimed against a bid bond. The bonding or surety business, which may sue the contractor to recoup the costs, will cover the difference. The bond terms determine a surety's ability to sue a contractor.

Is It Possible To Receive A Bid Bond If You Have Bad Credit?

If you have less-than-stellar credit, you may still be able to get bid bonds from corporations who agree to issue them, but you will likely pay more for the privilege.