Bid Bonds for Construction
Bid Bonds are submitted when bidding a construction project as evidence of good faith of the contractor’s intent to enter into the project. This is largely a tool required by public project owners as indication or confirmation that a contractor has the capability and capacity to perform. In another words, these are your “tickets to the dance”. No ticket – you can’t get into the dance!
What is a Bid Bond?
A bid bond is a type of surety bond that serves as a prequalifying security measure for the contractor to the project owner during the bidding process. If the contractor’s bid is accepted, the bond guarantees that the contract will be executed at the agreed upon price and conditions that were set forth in the original bid. If this does not occur, a claim can be filed against the bond by the project owner.
Additionally, if the contractor who has won a bid enters into an agreement but is not able to obtain the required payment and/or performance bond, a claim against the bid bond may also be made.
Many construction projects require that any contractor and/or subcontractor undergoing bidding, must first obtain a bid bond to be provided along with the bid itself.. Bids with this requirement that don’t come with a bid bond will be rejected.
Bid Bond Basics
A bid bond typically involves three parties:
The Principal – The bidder or proposed contractor
The Obligee – The Owner or developer of the construction project that is up for bid
The Surety – The agency that issues the bond to the principal
Similar to paying a premium for an insurance policy, the principal purchases the bid bond from the surety company for a specified price.
The coverage value of the bond, also called the penal sum, represents the maximum amount of damages covered by the surety. Penal sums can range anywhere from 5% to 20% of the total bid amount.
How Do Bid Bonds and Performance/Payment Bonds Work Together?
Bid bonds also serve as an additional guarantee to project owners that the contractor bidding on the job is sufficiently qualified to perform the work described. When a contractor applies for a bid bond, the surety performs an extensive background check that includes the applicant’s financial standing, credit and project history. Since the surety company underwriting a bid bond will also expect to provide the performance and payment bond, their confidence is key. Given this risk, sureties only issue bid bonds to contractors that they deem to be capable and reliable.
As mentioned, these types of bonds are typically required in tandem with one another. For instance, all state and federal projects require contractors to include a bid bond with their proposals, as well as performance and payment bonds once they’ve been awarded the project. Private projects, may carry similar requirements.
Bid Bond Requirements
Under the Miller Act, any contractor bidding on a federal construction project is required by law to submit a bid bond. Many private firms have followed suit and instituted similar requirements in order to protect themselves from risk during the bidding process. In some locations, surety bonds are also required in order to obtain necessary permits and licenses. Most importantly, just about all project owners require a bond before accepting any bids on their projects.
The requirements for federal surety bonds may be met a number of different ways. For instance:
Surety bonds issued by an approved corporate surety agency
Surety bonds issued by an individual surety that pledges certain specified types of assets
Individuals acting as sureties to satisfy bonding requirements on federal projects (provided they have adequate acceptable assets in the required amounts to support the bond)
Generally speaking, acceptable assets include cash, US agency securities, certificates of deposit and stocks or bonds that are traded on the NY, American or other specified exchanges. Unacceptable assets typically include anything that is difficult to liquidate, such as a life estate, jewelry or an individual’s home.
Because of all these rules and regulations, the easiest and most common way surety bond requirements are met is via an approved surety agency.