A bid bond also called a tender bond, is a type of surety bond posted by a bidder for a construction project to provide assurance to the project owner that the bidder will make realistic bids and take on the job if chosen. Bid bonds provide project owners with assurance that the bidder has the financial capacity to perform the task for the price quoted in the bid.
Like all surety bonds, a bid bond involves three parties:
- Obligee – In this case, the government agency or project owner requiring the bond.
- Principal - The contractor purchasing the bond and promising to adhere to the terms of the bond.
- Surety - The Surety Bond Company that is backing the bond for the Principal and ensuring financial guarantee to the Obligee if a claim is made.
Here, we take a closer look and answer some of your pressing questions about bid bonds:
What are the bid bond requirements?
Under the Miller Act, all bidders are required to submit bid bonds on any federal project. Even private companies have secured bid bonds to protect themselves from risk during the bid process.
Getting a surety bond is critical if you want your construction company to become competitive in the construction industry. In most states, a surety bond is required so you can obtain licenses and permits. Most importantly, almost all project developers and project owners will require a bond before you (as a contractor) can bid on their projects.
Are bond forms mandatory?
Yes. A project bid bond form is filled out and submitted, thus guaranteeing that the contractor agrees to the terms indicated in the bid contract and will complete the project.
Failure to do so can result in rejection of the bid and loss of the project.
A generic bond form cannot be used on federal projects. When a designated form is indicated, failure to use it could still cause rejection of the bid proposal.
What is the cost of a bid bond?
They are allotted for an amount postulated in the bid offer. The specifications often need security equal to 10% of the tender amount, although the costs may vary depending on jurisdiction and the amount of the value of the project.
To qualify for a bid bond, your financial statement does not necessarily need to show the same amount of cash to be eligible for the bond. The approval is based on the whole monetary picture.
How long does it take to get a bid bond?
Getting a bid bond, like all surety bonds, usually involves:
- getting a quote
- undergoing the prequalification process
- validation process by the underwriter
The duration could differ significantly. In some cases, the contractor will be able to receive their bond within a matter of hours. In other situations, the waiting time may be a little longer. By knowing exactly the requirements ahead of time and by trusting a well-known, reputable surety company, you will be able to go through the process much quicker.
What happens to the bid bond after the bid opening?
In a period of typically 90 days (depending on the surety), the bid bond becomes void automatically.
Also, the bid bond can remain valid if it is not sealed only if the Obligee chooses to accept it.
What follows if I'm not the first bidder (second bidder, third, and so on)?
Your bid security is held until the contract is granted so that the Obligee has the decision to award you the project if they wish. This is a good reason not to utilize cash security instead of a bond.
Do all public projects require bid bonds?
Typically, yes. Some federal projects may only require a bonding capacity letter from the surety.
What if I withdraw my bid?
Once you withdraw your project bid before the Obligee opens the bid, then you will not have lost the bid security.
But when the bidding has closed and the contract awarded, withdrawing the bid could mean losing your bid security.
Although in some cases, the Obligee (project owners) may allow a bid to be revoked if they do not find it objectionable.
Overall, the construction industry is a highly competitive market so treat bid bonds as the first step in the process. Since the law requires construction bonds in many states, it is critical that you know where to look, find, and secure that type of surety bond that you need.