Navigating Bid Bond Claims: Insights for Contractors

Claims on contractor’s bid bonds are a risk to be prepared for, but what if the owner’s delays in selecting a contractor are the catalyst for the claim?

Delays in Project Owner Selection

Various factors may cause a significant amount of time to elapse between a bid submission and the owner awarding the contract. The problem is, when an award is delayed the contractor’s situation may change. Their backlog may increase, material costs and lead times may change dramatically and labor may be committed to other jobs. In these cases, the contractor may determine it is no longer feasible or economical to perform the contract as originally bid. A contractor declining the contract will likely result in the project owner asserting a bid bond claim.

Cost Implications and Calculation

Bid bonds protect project owners against the cost of rebidding a project if the low bidder does not accept the contract. Understanding the mechanics of the bid bond and the claims process up front helps the contractor calculate its exposure and make a business decision as to how best to proceed.

The bid bond amount is a specific percentage (typically five to ten percent) of the bid amount and represents the maximum amount the owner can recover if the contractor declines the contract.

Generally, assuming the claim is valid, the amount owed to the owner is the lesser of the bond amount, or the difference between the contractor’s low bid and the second lowest bid.

Options for the Low Bidder

After evaluating the bid spread, the bond amount and its anticipated costs to perform the work, the contractor may decide to pay the owner the amount it would otherwise be entitled to recover under the bond, absorb the increased costs and proceed with the contract, or try to negotiate an alternative solution with the owner.

The Surety’s Role in Bid Bond Claims

As part of the surety’s independent investigation of a bid bond claim, the surety will work with the contractor to examine the solicitation, bid instructions, applicable law, specific bond terms, bid spread and the bid itself. In some circumstances, the owner’s failure to timely award the contract will release the contractor from its obligation to accept the contract or the surety from its obligation under the bond. The surety could also assist the contractor in negotiating a practical resolution with the owner. Regardless of the circumstances, open communication between the contractor and its surety can help the contractor make the right business decision and limit its exposure.

Mitigating Risk Through Contract Language

To reduce the likelihood of a bid bond claim, the contractor should consider negotiating the bid bond language with the owner up front to obligate the prompt issuance of an award or incorporating language into its proposal to protect itself from price escalations in the event of a delay in the award. The contractor’s surety is a great resource to assist the contractor with developing appropriate language to achieve the contractor’s objectives and mitigate the risk of exposure to the contractor.

How do I get a Surety Bond?

Surety bonds are issued by Merchants Bonding Company (Mutual) through insurance agents. Contact your local insurance agent or use our Find an Agent tool. They will guide you through the process, informing you of what documents and information are needed by the surety (Merchants Bonding Company (Mutual)) to underwrite your bond.

All information provided is subject to change.