Contractor Bid Bonds: Key to the Competitive Process
Contractor bid bonds are an important part of the construction industry. They help protect project owners, ensure that contractors are serious about accepting and completing work, and help keep the bidding process competitive. Merchants Bonding Company’s surety-only focus and common-sense underwriting philosophy make us a leading source to fulfill contractors’ bonding needs.
What's a Bid Bond?
A contractor bid bond is a type of surety bond that’s required by many project owners, typically a government entity, before they’ll award a construction contract. The bond guarantees that if the contractor is awarded the bid, they’ll actually enter into the contract. It also guarantees that if awarded the contract, the contractor will provide the required performance and payment bonds. Bid bonds are issued by a surety company, like Merchants Bonding Company.
How Do You Get a Bid Bond?
Surety bonds are obtained through insurance agents. If contractors don’t have an agent, they can use a tool like Merchants’ Find an Agent. The agent will guide the contractor through the process, informing them about documents and information needed by the surety to underwrite the bond.
How is the Bond Size Determined?
The size of a bid bond is based on a percentage of the project bid, typically from 5% to 10%. Federal projects require the bond to be 20% of the bid price. The bond is issued by the surety company which guarantees the bond.
What Happens if a Contractor Violates the Bond Terms?
If the contractor fails to enter into the contract or provide the required bonds, the project owner can file a claim. The claim can be against the full or partial amount of the bid bond, and typically covers the difference between the lowest and the next lowest bid. This protects the project owner from financial loss, and enables them to move the project forward. The contractor, per the indemnity agreement, is then obligated to pay back the surety company for the claim amount.
Why are Bid Bonds Necessary?
Surety bonds protect on many levels. Bid bonds protect a project owner from awarding a contract to a contractor who is not serious, or incapable of completing the work. Bid bonds help protect the bidding process as contractors may be less likely to submit low-ball bids if a bond is a requirement. Bid bonds can also help ensure the contractor has the financial resources to complete the project since part of qualifying for a bond involves financial review by the surety.
Key Features of a Contractor Bid Bond
- It’s a surety bond, a three-party agreement between the contractor (the principal), the surety company, and the project owner (the obligee).
- The bond guarantees the contractor will enter into the contract if they are awarded the bid.
- The bond guarantees the contractor will provide the required performance and payment bonds.
- The size of the bond is typically 5% to 10% of the bid price.
- The bond is issued by a surety company, a financial institution that guarantees the bond.
What is a Surety Bond?
A surety bond is a three-party agreement that ensures the fulfillment of a commitment or contract. For instance, the surety (Merchants Bonding Company (Mutual)) may provide a surety bond to a construction company (the principal) which is required by the state (the obligee), ensuring the construction company will perform the duties as outlined in the contract. In bonding the construction company, Merchants assumes the risk should the company default or not fulfill their contract. A surety bond is different from traditional insurance in that the principal is obligated to pay back the surety company on any claims paid out.