General

How Bid Bonds Work: A Helpful Guide for Contractors

With the increasingly high stakes in the quality of work provided by construction workers, most construction projects today require some form of protection bonds. Contractors are required to provide bonds or contracts so that the owner is protected against non-payment, unsatisfactory performance, legal and warranty issues. There are many types of construction bonds present in the market these days, bid bonds being one of the most common ones.

A bid bond ensures that the owner gets compensated if your work doesn’t meet expectations. Bonds are considered essential requirements in today’s construction market; they provide a contractor’s ability to hold to their promises. They’re also proof of the contractor’s financial ability to complete a particular project. Bid bonds can be purchased through a surety agency, these usually include banks or insurance companies. 

The Basics

The process of bidding for a construction project consists of three parties; the obligee, or the owner who needs to get a construction project done the principal or contractor required to obtain a bid bond, and the surety. The bid bond is purchased from the surety, similar to how the premium of an insurance policy is obtained. It is used to cover a set amount of expenses in the event of an accident. The penal sum is a percentage of the bid range ranging from five to twenty percent.

The bid bond effectively prevents the contractor from withdrawing from the bid after discovering the value of the competing bids. As a result, they are advantageous to both developers and contractors. By assuring compensation in the event of any lousy job, the risk factor for the obligee is reduced. A contractor, on the other hand, benefits from having a clear image of their position. This prevents contractors from bidding on unrealistic projects, saving them time and effort.

How They Work

A bid bond makes sure that a contractor doesn’t promise more than they can provide to win a contract. The construction bidding process involves the calculation of the total cost required for a specific project, followed by the bidding process. Many contractors offer suitable prices according to the materials, equipment, and methods of construction they use. The owner is then responsible for deciding which contract bid to accept. 

The bid contract then guarantees that the contractor will provide precisely what they stated in their bid. If the contractor denies providing the services they have mentioned in the agreement; the surety is responsible for paying for any damages the developer faces, and thus protects the owner from any financial losses. The bank or insurance company usually pays the additional expense of replacing the contractor with another while suing the contractor for breaking the terms of the agreement.  

The Cost Of A Bid Bond

Although bid bonds are the least expensive out of the many construction bonds in the market, it’s still a considerable amount to pay. A bid bond’s cost depends upon numerous factors, the main one being the total expense of the construction project. It will also depend a lot on the location of the construction site, the owner’s reputation, and the contractor’s financial history. 

For relatively construction projects, the bid bonds usually cost $100 or $200. Larger projects depend on the total budget of the construction and the penal sum of the contract. Generally, the cost of bid bonds ranges from five to ten percent of the penal sum. For instance, if the price of a specific project is $500,000 and the contact sum comes up to $50,000, then the bid bond will cost around $500 to $2500. 

The Requirements

The standard law requires all contractors to submit a bid bond on any construction project. Private companies also have this as a requirement for obvious protection reasons. In some states, obtaining a surety bond is a prerequisite for obtaining permits for construction purposes. Federal surety bond requirements can be completed in the following ways.

  • Surety bonds obtained from a corporate agency like a bank or insurance firm
  • Surety bonds based on an individual’s pledge to pay using their assets.

Acceptable assets can be cash, credit or certificates of deposits, stock currencies, etc. some assets are unacceptable for surety bonds that may consist of jewelry, real estate, individual sureties, etc.

Construction bonds are a prerequisite in today’s market if a contractor even wants to compete. Surety bonds ensure protection for both the owners of the construction plan and the contractors. Bid bonds are the most commonly used construction bonds today and constitute a simple process and requirement. By understanding the way bid bonds work, you’ll be able to ease into the market much more effortlessly.

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