When it comes to construction jobs, a bid bond is an important way to make sure the project gets finished. Contractors or subcontractors should prove that they have enough financial assets to see the project to the end.
While it might be tempting to hire the cheapest offer, without the bid bond, there is a huge risk of everyone losing money when the contractors do not finish the job. Moreover, the price or cost of the project is agreed upon here as well, as this influences the amount of money required for the cash deposit.
Bid Bond in Detail
Construction projects are commonly subcontracted to companies who will then be responsible for finishing a specific part of the building. Owners or investors are then assured that they have the means to accomplish their part of the project. One of the ways to do it is to get a bid bond.
It works out because these contractors are then giving a certain amount of money from a third-party guarantor who will eventually become liable as well for any financial obligations should the contractor not fulfill the terms of the job. Without this bid bond, they will find it very hard to win the bidding process.
This amount of money is given in cash by the interested contractors. They secure this by borrowing from a surety. Because this is similar to a debt or a loan, they thoroughly check the financial status of the contractor before approving it. They will conduct a background check to also be sure that they have not had a history of bad credit or even issues in previous projects. Even personal credit history may be checked, as well as the financial statements of the company. The experience in the field is also a factor in awarding the bid bond.
Advantages for Owners
At times, project managers or property owners encounter bogus contractors who may submit a very low bid but then fail to execute the contracted project. Since bidders need this bid bond in order to be considered for the project, the bid bond requirement weeds away these bogus and unserious offers.
Moreover, if for any reason, the contractor fails to push through, the owner will have to choose the second lowest bidder, paying more than what was initially agreed upon with the first bidder. It is then possible to claim the full or part of the bid bond, thus covering these additional costs.
Once the contractor wins the bid, the bid bond gets replaced by the performance bond. This protects the owner in the case the contractor fails to accomplish the project according to what was agreed upon. This money can be used for additional costs related to repair or correct the work.
How Much Are Bid Bonds?
The typical amount required for a bid bond is from 5 to 10% of the tender price. However, bids for a federally funded job would require more, at 20%. Various factors will affect the bond’s cost, like bid amount, contractual terms, and jurisdiction of the work. For example, if the contractor wants to bid $250,000 for a public school roofing project, interested parties will need to submit $50,000 as bid bond along with their bids in order to be considered for the project.
A surety risks losing a lot of money on a contractor that will eventually not be able to finish the job and even default. By providing the bid bond, they also take on the responsibility of paying the cost of a winning contractor not pushing through with the project. They can lose up to the same amount of the bid bond. This is the main reason why sureties are also doing a thorough check of contractors so that they will only issue the bonds to reliable and financially stable ones.
Issuing a bond to such a bidder places a big potential burden on the surety, if they issue a performance and payment bond afterward and there is the chance of contractor default. Therefore, sureties only issue bid bonds to contractors they deem reliable and capable.
Contractors who are able to present a bid bond will be one step closer to winning a project bid, as it acts as a guarantee for your business. This way, everyone stands to benefit and still be protected in every type of situation.