What is a Bid Bond?

Definition of Bid Bond

A bid bond is a type of surety bond used when companies bid on public construction projects. If you have a business and you want to bid on the government’s construction work, one of the requirements you will come across is a bid bond that will be included with your proposal. If you plan on regularly bidding on construction work by the government, the best course is to set up a surety line with a surety insurance agent.

What is a bid bond and why is it important?

A bid bond is important because it guarantees the project owner that you can abide by the bid contract and accomplish the job that is laid out in the contract. Having a bid bond is an assurance that you have the capability to implement and take on the project if you are selected in the bidding process.

Project owners are unsure if a contractor has the necessary resources to take on the project or if he is even financially stable. But with the bid bond, the project owner will feel assured to award a project to a contractor knowing he can collect compensation from the surety bond if the project fails.

What if the Construction Bond Obligation is Not Met?

If worse comes to worst and the construction bond obligation is not met, the contractor and the surety are liable for the bond. The contractor will encounter penalties for failure to comply with the bond’s obligations and any additional costs the owner incurs in selecting and awarding another contractor. The penal amount of a bid bond is 10 to 20 percent of the bid amount.

What is a Bid Bond in the case of exporters?

To collateralize bid bonds and win foreign projects, exporters put up assets. By doing this, they tie up assets that could be used to finance the accomplishment of the export contract itself. This impedes the ability of exporters to take on new deals and creates serious working capital constraints. Banks are also unwilling to accept assets that are export-related as collateral because it is possible that they will encounter difficulty in collecting inventory or accounts receivable outside of the United States jurisdiction.

How do Bid Bonds Work?

Project owners are secured when they request a bid bond. Having this keeps contractors from proposing frivolous bids since they are obligated to perform the job or pay the bond premiums. Companies that issue bonds perform comprehensive financial and credit reviews before agreeing to provide bonds for a company.

A number of contractors estimate what the job will cost to complete during bidding. In the form of a bid, they submit the price to the owner. Usually, this means that the bonding company will recompense the owner the difference between the lowest and next lowest bid. To recover these costs, the bonding company may sue the contractor but the possibility of a lawsuit would depend on the bond’s terms.

What is a Bid Bond – Requirements

All bidders are obliged to submit bid bonds on any federal project under the Miller Act. Several private firms have imitated this trend to protect themselves from risk during the bid procedure. In the construction industry, getting surety bond is essential if you want your company to become competitive.

In some localities, a surety bond is a prerequisite to obtain permits and licenses. Most importantly, majority of developers and project owners require a bond from you before you can even start bidding on their projects.

Are you in a hurry for a bond? South West Bond Services offers various types of bonds. We select the best insurance companies with the highest standards as surety providers. You can feel confident that your bonds are placed with surety companies known for their integrity, quality and honesty. For more information, contact us at 623-974-6453 or e-mail contact@bondwriter.com.