How Bid Bonds Keep Government Entities Safe from Bad Business

Whether building roads, bridges, schools or offices, government organizations are one of the largest purveyors of private contracts nationwide. These lucrative contracts are generally handed out to the private firm offering the lowest bid for the project. But how does the government know if a company has the means to take on a project? How do they know a company will complete the project on time? How do they know if a company will operate safely?

In the 1800s, Congress began to realize that a high number of their projects were being abandoned by contractors, and taxpayers were left to cover the bill a second time when another company was hired to finish things off. Companies were underbidding to win projects, taking a few government paychecks and then heading for the hills. To remedy this deteriorating situation, bid bonds were born.

Like most bonds, a bid bond is issued to a private company by a surety. This bond essentially pre-qualifies the company to perform work for the government. The bond does not protect the contractor, but instead protects the owner of the construction project (usually the government) against contractor failure. It also works to protect any subcontractors against nonpayment.

Should the winning contractor fail to perform their duties, the government will hire the next lowest bidder for the job and the surety will pay the difference. Because the surety is not insurance, however, the original contractor is not off the hook and must repay the amount granted to the government.

The established process of requesting and issuing bid bonds works for several reasons: Bid bonds remove the liability from the government. Instead of forcing public groups to pick and choose from a vast pool of project applicants, the field is immediately narrowed by sureties. These private organizations independently verify the legitimacy of a bidder and ensure that they can and will complete the task. This way, the government knows that all bidders are qualified and can feel safe selecting the lowest bidder.

The process of receiving a bid bond makes things fairer for contractors. If a contractor bid on a job with the government and was rejected, they would have nowhere else to appeal the decision. Instead, when a contractor is denied a bond by one surety group, they have hundreds of other groups with which they can apply.

Sureties remove the possibility of political maneuvering behind the scenes. When all contractors are bonded, the government is forced to hire the lowest bidder, not the one with the most political clout.

To learn more about these contract bonds, visit our Bid Bonds page, or contact one of our bonding professionals.