Bid bonds typically require a contractor to provide between 5% and 10% of the bid upfront as a penal sum. Contractors prefer these bid bonds because they are a less expensive option and they don’t tie up cash or bank credit lines during a bidding option. However, federally-funded projects usually require the penal sum to be 20% of the bid. Moreover, the surety company will seek damages from the contractor for any losses. Contractors pay surety agencies a premium to secure a bid bond. Bid bond costs vary greatly due to a number of factors, such as the bid amount, contract terms, and the jurisdiction in which the contract is executed. Typically bid bond premiums are between 1% and 5% of the penal sum.
As a construction contractor, it is essential to recognize the importance and impact of a bid bond or tender bond. Before you place your bid, you should proceed through our application process, so you can obtain your bid bond, increase your chances of winning the bid and protect your investment!
When you submit your application, the surety bond company will do a thorough evaluation of your credit score and financials to determine a bond premium you need to pay to get the bid bond. Normally, bid bonds cost between 5% and 10% of the total bond amount required.
This is especially true if you work on a federal project. A-rated means that the bonding company has an “A” score given by the A.M. Best Company, the best-reputed rating agency in the U.S. A rating of “A” guarantees that the surety underwriter is dependable, meaning the obligee will always accept a bid bond provided by it. You may also need to look for a T-listed surety, meaning that it is approved by the Department of Treasury to underwrite bonds for federal contracts.
Some contractors will encounter a situation, which requires them to withdraw their bid. You can only withdraw your bid, without losing your bid security, if you do so before the developer opens your bid. There are some cases, when the developer will give you the option of retracting your bid, without repercussions. If you must retract your bid, it is highly recommended that you do so quickly!
It is important to note that bid, performance, and payment bonds are not intended to protect the contractors that have to post them. Instead, these bonds are intended to protect the owner of the construction project against contractor failure and to protect certain laborers, material suppliers, and subcontractors against nonpayment.
Naturally, the safest way to avoid claims is to not submit false bids. But mistakes in bid calculations do happen and sometimes they are not within your control. If you manage to prove this was the case, you can fend off a claim, but it’s best to make sure your bid is always correct. The use of a reliable construction estimating software can greatly reduce the risk when placing bids.
You are responsible to pay bond claims in full, which can be as large as the full bond amount (including legal costs). The indemnity agreement you must sign to get your bid bond is a legal contract that pledges your corporate and personal assets in the event of bond claims. Watch our video for an easy to understand explanation of how bond claims work. Unfortunately, most bond agencies won’t take the time to explain how claims can put you at risk and how to avoid them; if this happens when working with a bond agent, it should be a big red flag to reconsider doing business with them. Your bond agency should be your first line of defense against bond claims. You can also learn how to find the right bid bond companies for you.
It's important to keep in mind there are costs for the obligee to set up and execute a proper bidding process for a public job. The obligee has to employ architects and engineers to evaluate the bids from different contractors, organize pre-bid meetings to go over project specifics with contractors who have expressed interest in the project, and promote the actual bid date so there are plenty of contractors to choose from. The bid bond ensures the obligee isn't left out to dry if you decide to abandon the project.
Ensure that the bids you submit are accurate and obtain performance bonds when you are awarded contracts to avoid claims on your construction bid bonds. As mentioned above, you are responsible to pay for any bond claims that you cause, which can be as high as the face value of your bond. If claims do occur, find out how our company can save you money on them. If you need help understanding exactly what your bond guarantees you will and won’t do, please contact a bond professional.
As mentioned above, payment and performance bonds protect the public. If a contractor defaults on a job that isn't bonded with performance and payment bonds, the taxpayers will end up paying for an entirely new contractor to come in and complete the job. On the slip side, if a contractor defaults on a bonded project, a claim can be filed on the performance bond to pay for a new contractor to get the job done.
When public contracts are bonded with performance and payment bonds, the laborers, subcontractors and suppliers are protected because the bonds ensure they will get paid. If no performance and payment bonds are required, the subs and suppliers have no way of getting paid if the contractor defaults or goes bankrupt. Keep in mind, if a contractor bids on and wins several public contracts without performance and payment bonding requirements and goes bankrupt, all of the subs and suppliers on each of these jobs will be left unpaid.
Before you begin exploring the overall benefits of our bid bonds, you should take the time to learn the basics. These bonds are basically a way to obtain financial security for contract bidding proposals. They’re frequently utilized for larger construction projects, especially commercial developments. By failing to file a contractors bond, the contractor’s bid will immediately be rejected and their time will be wasted. Therefore, all contractors need to become familiar with these bonds and use them each time they place a bid to get a Surety’s Consent or Agree to Bond!
You’ll likely need to get a bid surety bond that’s a specific percentage of the total estimated contract amount (most commonly about 5-10% of the total contract cost). This means if the project you're bidding on is estimated to cost $500,000 and you're required to get a 10% bid bond, you need to get a $50,000 bid bond. Keep in mind, the bid bond amount you need will vary by each job and obligee.
So how exactly do bid bonds protect projects owners? As with every surety agreement, there is a total bond amount up to which a contractor can be liable in case they violate the agreement. In this case the violation may be that you refused to take on the project or that you asked for a higher price.
Even though the taxpayers, laborers, material suppliers and subcontractors would be left without protection if there were no bonds, some people suggest that government employees should prequalify the contractors that perform government construction projects. For a number of reasons, contractor prequalification by government employees is an unattractive alternative.
To understand bid bonds for construction projects, you first need to know what surety bonds are. Simply put, surety bonds are a three party agreement between a principal, an obligee, and a surety. In this case, the principal is the contractor, the obligee is the project owner, and the surety is the bonding company which backs the agreement.
There are only two alternative methods of performing public construction. The government may perform the contract with its own forces or retain a private contractor to perform the construction contract.
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