Bid Bonds: What are they?
A bid bond is a type of surety bond that may be required when placing a project bid, especially with large commercial projects.
Failing to obtain a bid surety bond may automatically disqualify a company from the bidding process on a project.
It gives the developer a guarantee that contractors will only submit serious bids and cannot retract the bid or decline the job.
This type of bond prevents a contractor from entering a very low bid and then turning around and increasing the amount once entering into a contract.
Here is a guide to help you understand more about Bid Surety Bonds.
What is the role of a “bidder”?
Bidders do what they do: Bid. They are an indispensable element of an operational project in any market. By demonstrating the amount they are willing to pay, bidders indicate to the market whether demand is increasing or decreasing. High demand may prompt more project owners to enter the market, although it can be a very competitive one, especially in the construction industry.
How does a Bid Bond work?
Under the Miller Act, most states require contractors working on government construction projects to post a surety bond.
For contractors pursuing public construction projects (whether it’s a city, state, or federal project), ‘bidding’ is how they obtain new jobs. They put an amount of effort into creating a project proposal and planning a bid budget. The proposal would include the estimates, materials and supplies, subcontractor price, and insurance, which could take a lot of time. When they learn that their bids are low and are not granted the project, they lose the time, expenses, plus revenues and missed job opportunities. The contractor will get a bond bid form to advise the surety company of the actual date of the bid. An estimated contract price will be indicated on the bid surety bond form, which is the focus of the surety underwriters in making a decision.
The contractor will get a bond bid form to advise the surety company of the actual date of the bid. An estimated contract price will be indicated on the bid surety bond form, which is one of the key focuses of the surety underwriters in making a decision.
Bid Surety Bonds are the initial steps in a series of developments that eventually will result in being granted a performance bond.
Do I need to get both bid bonds and performance bonds together?
No. You could have either one without the other. But failure to provide a bid surety bond could lead to loss of bid security and contracts and may discourage sureties from issuing you performance and payment bonds later in the process.
Performance bonds promise that the contractor will fulfill the contract as agreed and enable contractors to conform to bidding requirements on government, public, and private projects.
What is the benefit of getting a Bid Guarantee?
Having a Bid Surety Bond or a bid guarantee is beneficial to the project owner in two important ways:
- The bond conveys to the owner that there is an underwriter that stands behind the work of the contractor placing the bid and will put up the performance bond if the contract is awarded to their principal.
- The project owner will have some security if the lowest-bid contractor awarded the contract decides to back out. The owner, also known as the Obligee, can then choose to make a claim against the bid surety bond in order to make up the difference between what they would’ve paid for the lowest bid and the next highest bid for their project.
How much does it cost to get a Bid Bond?
The cost of a Bid Surety Bond can vary depending on jurisdiction and the amount of the project’s value. In many cases, sureties charge a fee for each bid (around $100-$250). Once a bid is accepted, the cost will depend upon the size of the bond.
A Bid Surety Bond cost is entirely different from the Bid Surety Bond amount!
You will need to post a Bid Surety Bond that is the exact percentage of the total estimated contract cost (typically ranging from 5-10% of the total contract price).
If you are bidding on a project that costs $100,000 and you are required to get a 10% Bid Surety Bond, then you need to post a $10,000 bid surety bond. Bid surety bond amounts also vary based on each construction job and specifications of an Obligee.
Tip: To qualify for larger contract/construction bonds, have a CPA work with you to help ensure your financial documents are planned and coordinated to facilitate a surety’s decision quickly.
One of our agents can help you determine the cost of your bid surety bond, if any, for your next bid. Once the amount is determined, we can work quickly to get your bond to you.
How long does it take to get a Bid Bond?
Surety underwriters may ask for a copy of the bid invitation to see the actual bidding date. The duration may vary depending on your submitted requirements. For contractors that have a strong financial capacity, solid work experience on construction projects, and completed application forms are more likely to be issued bid surety bond in a matter of hours or a few days.
Remember – when it comes to bidding – there may have other bidders vying for the same project. And to be issued a bid surety bond, the bottom line will always be your working capital and bonding capacity.
What is a bonding capacity?
It is what underwriters will look into if you are qualified for the job.
The type of work being performed, the breakdown of costs, the bid spread, the bond forms being used, and the contract form to be bonded are all details reviewed by the surety each time a contractor requests a bid surety bond.
Below are some of the things that a surety may consider when determining a contractor’s bonding capacity:
- Financial capability (includes working capital, net worth, and personal)
- Lines of credit
- Financial position of any partner or associate companies
- Credit scores
- Completed projects
- Current work
If you feel that you cannot meet the terms of the agreed contract price, you can choose to withdraw your bid.
What happens if I withdraw my Bid?
If you withdraw your project bid before the project owner opens the bid, then you will not have lost the bid security. However, once the bidding has concluded and the contract awarded, withdrawing the bid could mean losing your bid security. In some cases, the project owner may allow a bid to be withdrawn without taking action.
If you decide to withdraw because the bid amount is higher than the amount stated in the bid documents, you may consider reviewing your bond form and see if it indicates a capped Bid Surety Bond.
What is a capped Bid Bond?
Capped Bid Surety Bonds usually occur if the Bid Surety Bond has a maximum dollar amount. Federal or state public construction projects require a bond that automatically adjusts to the submitted contract amount (10%-20% of the bid). However, in some cases, a capped bid bond is issued.
Capped bid bonds are worth not more than the specified percentage of the already approved estimated contract price.
For example, a project valued at $100,000 is issued a 10% bid bond. If the bond is capped, the amount won’t be more than $10,000. When a contractor submits a bid proposal for more than $100,000, the bid security will be thrown out.
How do you know if the bond is capped? The bond form may indicate, “Ten Percent of the contract amount bid not exceeding $10,000.”
Tip: Never submit false bids or end up losing not only that construction project opportunity but your good reputation.
How do I get a Bid Bond?
Submit an application and your financial documents.
Do not forget to include the bid bond form.
Bid bond forms are mandatory.
A surety company can provide you industry standard copies of a downloadable bid bond form sample. However, this may depend on the Obligee. The Obligee may furnish you with bond forms that are specific to the contract.
To help you stay on top of the competition and understand your bid bond requirements, contact a specialty surety bond broker licensed in your state or city to request a free quote. Our licensed bond agents will help you find your way to getting approved for a construction surety bond in a fast, efficient, and affordable manner. Call us today!