Everything You Need to Know about Bid Bonds for Construction Projects

Are you preparing to put a bid in for the next project you want to work on? In many cases, especially if the project is a public one, you will be required to post a bid bond. A bid bond is a type of surety bond guarantee protecting the project owner.

If you are new to the concept of surety bonds and bid bonds in particular, a clear understanding of  what bid bonds are is essential. We will also delve into more details, such as what responsibility bid bonds carry and how they can be obtained most easily.

What is a bid bond?

To understand bid bonds, you first need to know what surety bonds are. Simply put, surety bonds are a three party agreement between a principal, an obligee, and a surety. In this case, the principal is the contractor, the obligee is the project owner, and the surety is the bonding company which backs the agreement.

In accordance with the Miller Act, a bid bond needs to be in place when a contractor submits a project bid. The purpose is to make sure the contractor will take on the job in case they are awarded the bid. It also guarantees that they will accept to do it at the price they put in the bid and not try to increase it. Finally, a bid bond is effectively a promise that the contractor will procure a performance bond before starting work on the project. A performance bond is another type of surety bond, which safeguards the project in case of contractor default or breach of contract.

Keep in mind that many private project owners may choose to require the submission of a bid bond, as well.

How does a bid bond work?

So how exactly do bid bonds protect projects owners? As with every surety agreement, there is a total bond amount up to which a contractor can be liable in case they violate the agreement. In this case the violation may be that you refused to take on the project or that you asked for a higher price.

When a violation is present, the project owner can file a claim against your bid bond. If the claim is valid, the principal (i.e. the contractor) and the surety are jointly responsible for paying it. Since signing an indemnity agreement between the principal and the surety is an industry standard, the contractor will ultimately be responsible for reimbursing the surety. Most often, the penal sum of the claim will amount to between 10% and 20% of the bid amount.

How to get a bid bond

To get a bid bond, you need to apply with a surety bond agency, as bonding companies typically don’t work directly with the public. It’s important to work with an agency that issues bonds by A-rated and T-listed surety bond companies.

This is especially true if you work on a federal project. A-rated means that the bonding company has an “A” score given by the A.M. Best Company, the best-reputed rating agency in the U.S. A rating of “A” guarantees that the surety underwriter is dependable, meaning the obligee will always accept a bid bond provided by it. You may also need to look for a T-listed surety, meaning that it is approved by the Department of Treasury to underwrite bonds for federal contracts.

When you submit your application, the surety bond company will do a thorough evaluation of your credit score and financials to determine a bond premium you need to pay to get the bid bond. Normally, bid bonds cost between 5% and 10% of the total bond amount required.

How to avoid bid bond claims

It’s important to take a moment and emphasize the importance of avoiding surety bond claims. Bond claims can severely hurt your reputation and make it less likely that you can get bonded the next time you want to bid on a project. They can also be quite costly.

Naturally, the safest way to avoid claims is to not submit false bids. But mistakes in bid calculations do happen and sometimes they are not within your control. If you manage to prove this was the case, you can fend off a claim, but it’s best to make sure your bid is always correct. The use of a reliable construction estimating software can greatly reduce the risk when placing bids.

As a construction contractor, have you had to post a bid bond before? Tell us your experience of the process by leaving a comment below the article.

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