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Bid Bond
What is a Bid Bond?
The definition of a Bid Bond is a type of surety bond, specifically a type of contract surety bond, that guarantees a contractor can and will enter into a contract and will post a Performance Bond and/or a Payment Bond if they are awarded the contract they are bidding on. Although, bid bonds are predominantly used when bidding on construction projects, especially public projects, they can be used for any similar type of bid-based selection system.
Bid Bonds sometimes act as prequalification devices that demonstrate contractors are capable of fulfilling the work they are bidding on. They also act as a filter that ensures only serious bidders submit proposals on projects.
Bid Bonds are also called Bid Security and can be used in lieu of the bidder posting a cashier’s check or an irrevocable letter of credit (ILOC).
Bid bonds are not costly, at all. In fact, The ProSure Group can issue an unlimited number of bonds per year for as low as $100. And, depending upon the extent of our relationship, we will even issue complementary bid bonds.
The real bid bond cost comes in the time it takes to getting established with a surety bond relationship - if one is not already established. Our goal at The ProSure Group is to always streamline this process. With this, some of the factors that add to the time needed to get established are: size of project needing bonds, experience, credit history, time in business, financial status, the nature and specifics of the project.
A bid bond legally binds bidders to their offer and puts financial “skin in the game” from the contractor. It provides the project owner assurances that the bidders will abide by the terms of the bid documents and that should a contract be offered the contractor will execute it and provide any additional required surety bonding, i.e. payment and performance bonds.
If the project owner complies with its obligations and chooses to proceed and the contractor cannot or will not comply, the bid bond will compensate the project owner for damages and the additional expense of accepting a higher price from the next responsive bidder.
It is important to know that a bid bond is extremely unlikely to be provided on a project unless the bonding company is fully prepared to support the forthcoming project with the additional guarantees the contract may demand. As such, it is on the bid bond that most of the intensive review of the contractor takes place.
Project owners, who are also known as obligees, require contractors to post a bid security bond as part of the terms to the Invitation to Bid (ITB) or the Request for Proposal (RFP). Obligees can be any type of governmental entity - at the federal, state, or local level or they can be a private entity - such as an association, a general contractor, a public or private company, enterprise, or individual.
Basically, any Obligee or entity that wishes to ensure that the bidder is not offering a frivolous bid but is rather making a true, bona fide offer or bid that is fair and accurate.
The bid surety bond will protect this Obligee/project owner/purchaser from contractors that refuse to enter into a contract after the contract has been awarded. Contractors sometimes refuse to enter into a contract when they realize their bid was too low and can't complete the job on time and/or on budget. This puts the project owner in a tough situation because they would have planned and budgeted for the project based on what the contractor stated they could complete it for. The owner would then need to spend additional resources on putting a project out to bid again and and hiring a new contractor.
Bid Bonds, Performance Bonds, and Payment Bonds are all types of surety bonds that are frequently used in construction or many other industries to ensure a contractor is serious about committing to take on a construction job or other contract and have the ability to complete it properly and will pay all the related subcontractors and suppliers. Bid bonds reduce the amount of offers to those that are serious and within the bidder’s expertise and will be able to post the required Performance and Payment Bonds.
Performance surety bonds ensure the contractor will complete the project according to the terms and conditions of the contract, including the time for completion and the price agreed upon.
Payment Bonds are in place for the benefit of the owner/obligee to ensure a lien free project. In addition, they protect the project’s related creditors such as the subs and suppliers and ensure that they get paid for their labor and materials. In fact, a Payment Bond is sometimes referred to as a Labor and Materials Bond.
Bid bonds and Performance bonds and Payment Bonds almost always go hand in hand. This is especially true in terms of public work. Federal law states that a bid bond, a performance bond, and a payment bond are required for all publicly funded projects valued over $150,000. This law is known as the Miller Act. Many states, cities, and counties have similar laws and in some cases require these bonds for projects valued at less than $150,000.
Bid Bonds or Bid Guarantees are usually a percentage of the total estimated contract or bid amount. In most cases, they are 5-20% of the amount of the contractor’s bid. Sometimes, the Bid Bonds are required by the Obligee to be a set dollar amount as well. In most cases, however, the Bid Bond Amount is expressed in such terms as “Five Percent (5%) of the Total Amount Bid in U.S. Dollars ($)” or “Ten Percent (10%) of the Total Amount Bid in U.S. Dollars ($)” This is done in lieu of putting an actual fixed dollar amount in the case where the project bid amount is being calculated but isn’t yet finalized.
20% bid bonds are required for most solicitations for federal projects.
In many cases, the Obligee will provide the bond form in the bid package. It is very important to review this document because not all surety bond forms are the same. The ProSure group recommends, if possible, to use an AIA A310-2010 Bid Bond. The American Institute of Architects (AIA) collaborated with members from various groups including contractors, attorneys, surety bond producers, engineers, and insurance agents to provide this bid bond form as an industry standard, representing fair and balanced interests for all users.
Due to the nature of the surety relationship, Bond applicants must be willing to be transparent and willing to submit private information when applying for a bid bond, especially for large projects. Depending on the bonded obligation, this information may be required:
Personal credit information, personal financial information, company ownership information, project contracts, a work in progress (WIP) schedule, and business financials.
Applicants must also be prepared to sign a general indemnity agreement (GIA) once they have been accepted by a surety. A GIA is a contract between the bond applicant (principal on the bond) and the surety bond company that guarantees the principal will compensate the surety, using both corporate and personal assets, for any expense or loss the surety incurs due to bonds issued on behalf of the principal. This is standard practice and is a requirement no matter what surety company writes the bond. It’s a common viewpoint in the surety’s eyes if a business owner isn't willing to indemnify (back) their business then the surety should not be willing to either.
Depending on the size and complexity of the bond needs, it is important to know that it may take some time when establishing a new bonding relationship. In some cases, your bond request may be handled and approved the very same day. In other cases, more information and data may be needed for the benefit of all the parties involved in the bonded agreement in order to move things forward.
As a seasoned surety bond-only agency, The ProSure Group has streamlined this bonding process and enjoys the support and great relationships of many of the finest surety insurance companies in the world. In addition to our experience, we have:
Specialized programs for many industries and classes
In-house underwriting and authority
Over two decades of building very solid relationships with over 30 surety insurance carriers
All of these features allow us to respond quickly to a bond applicant’s needs with a viewpoint from an extremely large and diverse cross-section of the surety industry
Contact an expert at The ProSure Group today to begin your bonding process!
As surety bond experts in business for since 1993 in Florida, The ProSure Group has issued many thousands of Bid Bonds and has partnerships with more than 30 different surety companies. From day one The ProSure Group has specialized in providing surety bonds for the construction industry. This ensures that you’re dealing with experts that can give you the necessary guidance needed to navigate the surety process and coach you moving forward in ways to improve and maximize your bonding capacity to help grow your business. In addition, we will match you with the best surety relationship to fit you along with the best, most competitive pricing and terms available in the marketplace.
If you have any questions please do not hesitate to email us at contractbonds@prosuregroup.com or call us at our toll-free number 1-800-480-3883.
Depending on your bond needs, We have many programs available to assist. Some of these are for infrequent and/or smaller needs, such as our Express Programs. While others may be looking for a full surety bond program established for current and future needs. Of course, there are always instances that fall in between these two extremes where we can help.
