When a contract is put out to bid, the project owner requests and receives a bid bond from the contractors bidding on the project. Bid bond is a legal document that binds the contractor to the terms and conditions of the contract and guarantees the owner compensation if the contractor fails to complete the project within the specified time frame. In this article, we will look at bid bonds and their usefulness.
What Are Bid Bonds
Bid bonds are documents that demonstrate the bidder’s financial and other readiness to execute a project if chosen. They are not just any documents; they demonstrate the bidder’s financial standing and their capacity to carry out the contract in accordance with the guidelines set by the project owner. This document is also backed by a reputable surety company. This means that if the chosen contractor doesn’t finish the project on time, the project owner will be fully compensated.
Parties Involved in a Bid Bond
A bid bond appears to be a third-party document involving the bidding contractor, the project owner, and the surety, whether an individual or a surety company. Below are the parties involved in bid bonds and their roles:
The Project Owner
He advertises for contractors to bid on his project. He is the primary decision-maker in determining which contractor is chosen based on the bids submitted. He or a company he has chosen to represent him sets the criteria for choosing a contractor. If the chosen contractor doesn’t do the job, he can file a complaint and get compensated.
The contractor submits his bid for the advertised project through his company. He is also responsible for purchasing the bond from the surety company. Lastly, he is responsible if the project isn’t done by the time the bond says it has to be.
The Surety Company
Before charging a premium on the contractor, the surety company investigates the financial implications of the project, the ability of the bidding contractor, and other factors. Most of the time, surety companies do this with the expectation of an adverse event. If the contractor doesn’t finish the project on time, the surety company knows it will also have to take responsibility.
Importance of Bid Bonds
Avoiding frivolous activities
Bid bonds assist the contractor in ensuring proper bid documentation and provide both parties with a clear description of what to expect during project execution. Bid bonds also help the project owner get rid of bids that aren’t good enough. This saves them time and lets them focus on analyzing the bids that are better.
Legally Binding Documentation
Bid bonds serve as a legally binding document on the contractor to complete the project for which he has been selected. This assures the project owner that his project will be completed in accordance with the agreement he has with the contractor. The surety company that backs the bid bond acts as a third party to the agreement. This gives the project owner more confidence that he will get paid if his project isn’t done the way it was supposed to be.
Premium on a Bid Bond
This is the amount paid to the surety company by the bidding contractor as a commitment for his bid. It varies between 5% and 20%, depending on whether the project owner is an individual, a company, or a government agency. However, for small projects, there may be a flat rate of $100 to $200. You should read more about other factors to consider when determining the premium on a bid bond. Pay attention to factors like the project’s location, bid cost, the financial history of the contractor, and ownership of the project.
Other Requirements for Bid Bonds
Contractors who bid on a project must submit a bid bond. This applies to individual project owners, businesses, and government contracts.
Without a reputable surety company, you may be unable to submit a bid bond. A surety company gives you an advantage in a highly competitive industry such as construction. The contractor must also have a good credit history in order to gain the trust of a surety company. No company wants to put its brand at risk by hiring a contractor with a bad track record.
If an individual approves the surety bond, that individual must provide proof of ownership of assets worth the bond’s penal sum. Property, cash deposits with a reputable bank, stocks, and securities are examples of such assets.
A bond bid is a legal document binding a project owner and a contractor. It is backed by a surety company. The surety company pays the cost of hiring the next contractor as compensation for the first contractor’s failure. The surety company then takes on the task of suing the contractor who failed to complete the project on time.