What is a Bid Bond?
A bid bond is important to show proof of guarantee to the project owner that you can comply with the bid contract and also that you can accomplish the job as laid out in the contract. A bid bond is a guarantee that you provide to the project owner stating that you have the capability to take on and implement the project once you are selected during the bidding process. Normally, project owners do not know if a contractor is financially stable or has the necessary resources to take on a project. However, because of a bid bond, they will be more comfortable to award a project to a contractor knowing that if the project fails, they can collect compensation from the surety bond.
What Happens if the Construction Bond Obligation is Not Met?
If the bid bond obligations are not met, the principal-usually referring to the contractor- and the surety are liable for the bond jointly and severally. There are penalties that apply for failure to comply with bond obligations. The principal and surety are liable on the bond for any additional costs the owner incurs in selecting and awarding another contractor. This usually is the difference in dollar amount between the low bid and the second low bid. The penal sum of a bid bond often is ten to twenty percent of the bid amount.
How Bid Bonds Work
Requesting a bid bond will keep contractors from submitting frivolous bids, because they would be obligated to perform the job, or at least pay the bond premiums. Bond-issuing companies perform comprehensive credit and financial reviews before agreeing to provide bonds for a company. During bidding, various contractors estimate what the job will cost to complete. They submit this price to the owner in the form of a bid. This usually means that the bonding company will pay the owner the difference between the lowest and next lowest bid. Sometimes, the bonding company may sue the contractor to recover these costs. The possibility of lawsuits depends on the terms of the bond.
Bid Bond Requirements
Under the Miller Act, which is still the standard today, all bidders are required to submit bid bonds on any federal project. Many private firms have copied this trend to protect themselves from risk during the bid process. Getting surety bond is very important if you want your company to become competitive in the construction industry. In some localities, a surety bond is required so you can obtain licenses and permits. Most importantly, almost all project owners and developers will require a bond from you before you can bid on their projects.
Federal surety bond requirements may be met in different ways:
· Surety bonds issued by an approved corporate surety.
· Surety bonds issued by an individual surety that pledges certain defined types of assets.
Individuals may act as sureties to satisfy bonding requirements on federal projects if they have acceptable assets in the required amounts to support the bonds. To support bonds issued by individual sureties, agencies may only accept:
· Marketable assets.
· Letters of credit from a federally insured financial institution.Acceptable assets include cash or certificates of deposit; U.S. agency securities; stocks and bonds traded on the New York, American and other exchanges, among others. There are also unacceptable assets. These assets are those that may be difficult to liquidate, like a life estate in real property, jewelry, individual’s surety home, and several others.
The Department of the Treasury maintains a list of corporate sureties approved to issue bonds for federal projects, Treasury Department Circular 570.