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7 Things to Understand Before Securing a Bid Bond

The construction industry is a competitive and complex sector that demands adequate security and measures between the owners and contractors.

As per the global construction survey, the industry was predicted to grow exponentially and reach a target of $222,054.1 million in 2021.

Bid bonds are one such construction bond that assures compensation to the project owners if the contractor fails or withdraws from the project.

The bid bond definition implies that a legal agreement is secured between the two parties with the backing of a surety agency.

So, what aspects of bid bonds should you understand before attaining one?

Three Party Agreement

A bid bond is signed or agreed upon with the involvement of three essential players. The obligee is the project owner who sets the bond terms for the contractor. The principal or the contractor is the one who needs to acquire the bid bond.

The guarantor is the one who needs to assess the contractor’s company and financial background before issuing the bid bond.

Cost of the Bid Bond

The cost of the bid bond can vary depending on different factors. These involve the project’s cost, the contractor’s financial stability, the project owner’s whereabouts, and the location of the project undertaken. Generally, an annual fee is charged in the amount of $2,000 – $3,000. This fee will cover all bid bonds issued throughout the year.

The contractor then pays a premium to the surety agency based on the project’s magnitude once awarded and if Performance and Payment bonds are needed. For most projects, the premium will range from 1 – 1.5% of the tender value. However, a variety of circumstances can affect this figure.

Written Guarantee

Bid bonds are also considered a written guarantee between the project owner and the contractor in the presence of a surety or a guarantor. So, what is the role of a surety here?

They carry out comprehensive research and background checks on the contractor before approving their bond. It assures that the contractor has sufficient funds to execute the project in hand.

Performance Bonds

Once the bid is accepted, the bid bond becomes a performance bond. This is when a contractor and his company are expected to begin the project work.

As a project owner, the performance bond will help you if the contractor fails to perform or when their work is not satisfactory. The band takes care of the additional cost needed for redoing the project.

Expectations from the Bond

As per the bid bond definition, both the contractor and the surety team are answerable if the contractor fails to abide by the bond terms.

If the contractor refuses to work after winning the bid, the owner can transfer the project to the second-lowest bidder. The owner of the surety can claim the additional costs during such events.

Requirements of Bid Bonds

All contractors are obligated to get bid bonds to work on commercial or federal projects. Most project developers today look for contractors who have a bid bond. It adds value and financial trust with the backing of the surety agencies.

Type of Industry

Bid bonds are designed for various businesses. However, it is the most common for construction companies. All need to sign in for the bid bonds, ranging from general to electrical to mechanical contractors.

With its increased significance, bid bonds have become an integral part of the construction sector. Today, any contractor is expected to purchase a bid bond to garner more project work on a commercial scale.

Final Thoughts

More than a legal process, bid bonds have become necessary for securing construction projects. So, if you are looking to secure a bid bond, it is always better to scrutinize the diverse factors that make up this agreement.

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