Construction project owners want everything to go as smoothly as possible but know that this is hardly ever the case. Even after selecting a contractor and agreeing to terms, there’s always a chance that the bidder will be unable or unwilling to follow through with the work per the contract. This is why bid bonds are critical for protecting owners’ investments and keeping projects from failing.
Also known as construction surety bonds, the bid bond definition is a legally binding agreement for ensuring contractors make good on their stated obligations for a construction project. Typically submitted at the same time as the contract for the project, a bid bond provides the owner with financial and legal recourse if the contractor fails to live up to its end of the agreement at the stated price. Although most common in public construction projects, private projects also may require them. Bid bonds are backed by specialized surety companies, who evaluate the bidding contractor and charge it a premium that varies based on the estimated chances it will not be able to complete the contract.
For owners, bid bonds are critical for the assurances they provide. Without them, owners would have little insight into the credibility of a given bid, and fewer options in the event the bidder falls short.
How Bid Bonds Work During the Bidding Process
Bid bonds play an important role as contractors present their bids for a project. The bidding contractor seeks out a surety provider to secure the bond, after which the surety company reviews the contractor’s credit history, experience in the field, and financial statements. If the contractor’s financial health and history look good, the surety company approves the bond. The written guarantee is then submitted to the project owner as part of the bid submission.
In most cases, project owners ask for a bid bond representing 5% to 10% of the submitted bid price. This is determined by the terms of the contract as well as the jurisdiction in which the work will be performed and the amount of the bid. However, federal projects require a 20% bid bond.
Who Needs a Bid Bond and When It is Required
Whether a bid bond is required for a contractor to submit a bid depends on several factors. Some of the most common of these include the owner’s policies, any relevant statutory requirements, the project’s delivery method, and the overall value of the contract. Common use cases for bid bonds include government, healthcare, and education projects, as well as other types of formally procured capital projects. Contractors should always review the solicitation documents thoroughly before submitting a bid because not every project will use the same thresholds or bond forms.
Bid Bonds vs. Performance Bonds vs. Payment Bonds
Bid bonds are just one type of bond that may be involved in a large-scale capital project. Depending on the circumstances, there also may be performance bonds and payment bonds in play. Here’s a brief overview of what purpose each type of bond typically serves on a project:
|
Type of Bond |
Purpose |
Timing |
Project Stage |
|
Bid Bond |
Providing assurance that the contractor will be able to complete the work as submitted |
Secured during the bid submission stage |
Bidding and pre-planning |
|
Performance Bond |
Replacing the bid bond to protect the owner from the contractor’s failure to deliver the work as specified |
Upon approval of the bid and once the contractor begins the work |
Construction |
|
Payment Bond |
Providing payment protection for subcontractors and suppliers working under the general contractor |
Written as the general contractor drafts agreements with the subcontractor or supplier |
Post-construction, triggered upon the subcontractor or supplier filing a claim upon non-payment by the general contractor |
Common Bid Bond Terms Owners and Contractors Should Understand
When reviewing and securing a bid bond, there are a few basic terms that owners and contractors should understand before making the final agreement:
- Principal: The contractor
- Obligee: The owner of the project
- Surety: The third-party provider of the bid bond
- Penal Sum: The maximum amount to be paid by the surety company to the project owner if the contractor fails to fulfill its obligations
- Bid Withdrawl: Contractors can withdraw or alter their bids without penalty so long as they do so before the deadline
- Bid Responsiveness: This means the contractor has followed all bid bond requirements set forth by the project owner, including the submission of a bid bond — non-responsive bids are negated by the owner
Frequently Asked Questions
To provide financial and legal protection for the project owner against a contractor failing to meet its obligations.
If the contractor successfully completes the project upon winning the bid, the amount paid to prepare the bond will be returned. Alternatively, contractors who do not win a bid will be refunded the premium for the bid bond.
Only if the terms of the bid documents allow it. If submitting a bid bond is required under the terms of the project, contractors must secure one to be considered.
This means the contractor must secure a bid bond in the amount of 5% of the total bid. For example, a bid of $100,000 would require a $5,000 bid bond.
Most surety companies charge a nominal fee for preparing a bid bond, typically no more than $100 in most cases.
No, they may be required for certain private projects, as well. This is determined by the type of project, the jurisdiction, the owner’s policies, or project’s delivery method, among other considerations.
Bringing More Clarity to Construction Bidding Workflows
Having a structured and transparent bidding process makes it easier for owners to understand bid bonds and keep track of them. Projectmates’ owner-focused construction bid management platform delivers full transparency into bidding, as well as documentation control, cost tracking, and reporting and analytics.
To learn more about how our capital program management software can benefit your operations, get in touch with us today.
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