Contractors’ Guide to Bid Bonds

Contractors are required to obtain certain types of surety bonds before beginning a project, including bid bonds. They are required by owners for all public construction projects and can be vital to securing a contract.

They guarantee that the contractor will perform according to the terms and conditions of the project bid. They also provide the owner financial protection in case of a contractor’s default.

What is a Bid Bond?

If you win a contract, a bid bond, a surety bond, ensures that you will finish the project at the cost and under the conditions specified in your bid. It is used on construction projects and other similar projects where a bid-based selection process is used.

It is a contract between the obligee, the principal and the surety. The obligee is the owner or public authority who requires a bid bond, the principal is the contractor who submits a bid to win a project, and the surety is the underwriter that issues a bid bond to the contractor.

Bid bonds are typically required by government agencies, general contractors and others to allow them to bid on public construction projects. They also protect owners by encouraging competitive bidding and discouraging unqualified contractors from submitting frivolous, low bids to win contracts. 

Why Do Contractors Need Bid Bonds?

Bid bonds are used by project developers to guarantee that contractors submit severe bids and are financially stable enough to complete the work. A contractor’s proposal may be considered for a large project with them.

Bid bond requirements vary from project to project. They are often required for public sector projects that involve a lot of money.

The main reason contractors need bid bonds is to ensure they can honor their contract and provide the services they promised at the submitted cost. They also stop contractors from exaggerating their capacity or abilities.

If a contractor wins the bid but backs out of the project, the owner can use their bid bond to cover the difference between the awarded and the second lowest compliant bidder. This allows the owner to get their money back, which can mean the difference between a project being completed and not being able to finish it. Refrain from letting the fact that you believe the contracted project is too large cause you to start looking elsewhere. The fastbond program from Old Republic Surety focuses on quick turnaround projects for all construction trades. Their underwriting heavily relies on the agent’s knowledge of and endorsement of the contractor in addition to credit history.

How Do I Get a Bid Bond?

One of the most common contract bonds contractors require is bid bonds. They guarantee the project owner that a contractor will honor bid terms and perform work according to the contract.

Before approving a bid bond, surety companies will look at the contractor’s financial statements and personal and business credit reports. This will help them decide whether the contractor is stable enough to complete a project.

The amount of funding required for the project and its anticipated completion date must also be disclosed to the bond company. This will determine the amount of the bid bond.

Getting a bid bond is relatively simple and typically costs only a few percentage points of the total contract amount. In some cases, it can even be free for repeat customers.

What is a Performance Bond?

An example of a surety bond is a performance bond, which ensures that a contractor will finish the job. It is commonly used in construction contracts and commodity trades as a delivery guarantee.

A contractor or a property owner can use a performance bond to ensure that their projects are completed and that they are satisfied with the result. For example, suppose the contract stipulates the work’s quality or the completion timeline. In that case, a performance bond will legally guarantee that the contractor will meet these requirements.

Typically, a project owner will require a performance bond for 50% of the contract value or 100% of the contract value for service-based contractors. The amount will depend on the size and complexity of the project.


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