What is a Bid Bond?
Bid Bond Definition: A guarantee that the bid you submit for a project (usually public construction jobs) is accurate and will post a performance bond. If your bid is inaccurate, you win the project but back out of the job or cannot post a performance bond, a claim can be made against your bid bond which you’re responsible to pay. This often happens when a contractor underestimates the costs by missing a major expense for the job, and as a result is unable to get approved for the performance bond required to perform the work.
It's important to keep in mind there are costs for the obligee to set up and execute a proper bidding process for a public job. The obligee has to employ architects and engineers to evaluate the bids from different contractors, organize pre-bid meetings to go over project specifics with contractors who have expressed interest in the project, and promote the actual bid date so there are plenty of contractors to choose from. The bid bond ensures the obligee isn't left out to dry if you decide to abandon the project.
What Does a Bid Bond Cost?
Bids bonds are free of charge in most cases. If you want to see if you quality for bid bonds, please fill out our online application.
Where Can You Get a Bid Bond Form?
Our company can provide you copies of the AIA bid bond form, as we have all industry standard forms on file. However, if the obligee has their own specific bond forms you’ll need to get the forms from them.
How Do Bid Bonds Work?
Bid bonds are submitted with your proposal to the obligee. If your bid is inaccurate, a claim can be filed on your bond that you must pay, and you will likely lose the job. Bid proposals without a valid bond included are rejected. If you are awarded the job, you usually will have to provide a performance bond to start the project.
Bid Bonds & Performance Bonds Work Together
Bid bonds are the first thing you need in order to bid on public jobs, as they guarantee the bids you submit are accurate and that the surety company will write your performance bond if you win the job. If you are awarded a job, you’ll need to get a performance bond. Learn more about how bid and performance bonds work and what you’ll need in order to get both bonds.
How to Get a Bid Bond
You’ll need to send your bond agency the bid invitation letter, bid request form and job specifications that you get from the obligee for all bid bond requests. Check out our construction bonds guide where you’ll find every bond you need to work on public projects. However, you need to provide more than just the items listed above when requesting bid bonds for larger projects.
More Items Are Needed for Big Projects
If you want to bid on projects that are over $350K, you'll need to provide more than just the bid request form and job specifications. Larger contracts are based on more than your personal credit, as the surety company will also request and review your business financials and industry experience. All of this information is required and used to get an idea of whether your company is able to handle the larger project you want to bid on, so make sure you provide the most accurate information possible to present your business as capable to get the job done. Using a construction CPA is highly recommended to present your company in the best light possible and give you the highest chance for approval.
As mentioned above, the required bid request form asks for contract details such as the job cost breakdown, which includes profit, materials, labor, subcontractors and overhead. Presenting these details can be confusing and difficult when trying to record in a paper system. That's where construction bid software comes in; it can be used to estimate your contract costs and view and manage your company's most important metrics. Harnessing the power of software will give you a better chance at winning the projects you want.
Construction Bid Bond Claims Can Put You at Risk
You are responsible to pay bond claims in full, which can be as large as the full bond amount (including legal costs). The indemnity agreement you must sign to get your bid bond is a legal contract that pledges your corporate and personal assets in the event of bond claims. Watch our video for an easy to understand explanation of how bond claims work. Unfortunately, most bond agencies won’t take the time to explain how claims can put you at risk and how to avoid them; if this happens when working with a bond agent, it should be a big red flag to reconsider doing business with them. Your bond agency should be your first line of defense against bond claims. You can also learn how to find the right bid bond companies for you.
How to Avoid Bond Claims
Ensure that the bids you submit are accurate and obtain performance bonds when you are awarded contracts to avoid claims on your construction bid bonds. As mentioned above, you are responsible to pay for any bond claims that you cause, which can be as high as the face value of your bond. If claims do occur, find out how our company can save you money on them. If you need help understanding exactly what your bond guarantees you will and won’t do, please contact a bond professional.
What Bid Bond Amount Do You Need?
You’ll likely need to get a bid surety bond that’s a specific percentage of the total estimated contract amount (most commonly about 5-10% of the total contract cost). This means if the project you're bidding on is estimated to cost $500,000 and you're required to get a 10% bid bond, you need to get a $50,000 bid bond. Keep in mind, the bid bond amount you need will vary by each job and obligee.
Can You Get Bid Bonds WIthout Performance Bonds?
Simply put, probably not. Most surety companies won't provide you bid bonds for projects that leave out performance bond requirements because there is more risk involved without having performance bonding to ensure projects will be completed properly. Bid, performance and payment bonds are almost always required by law for public jobs. Why? These bonds are protection for the public because they guarantee that your bid will be accurate, that you'll complete the work properly and that you'll pay any subcontractors or suppliers according to the contract. Please be advised, there are times when job owners don't require performance bonds, and there are downfalls that come along with leaving the bond requirements out.
3 Reasons Jobs Without Performance Bonds Are Risky
1: Subs and Suppliers Aren't Protected
When public contracts are bonded with performance and payment bonds, the laborers, subcontractors and suppliers are protected because the bonds ensure they will get paid. If no performance and payment bonds are required, the subs and suppliers have no way of getting paid if the contractor defaults or goes bankrupt. Keep in mind, if a contractor bids on and wins several public contracts without performance and payment bonding requirements and goes bankrupt, all of the subs and suppliers on each of these jobs will be left unpaid.
2: Less Growth for Your Business
The surety company is one of your greatest allies when bidding on public projects, as they will work with you to help you meet the various requirements to get bonded and pair you with jobs that you can reasonably handle. Both of these will result in helping grow your business. It benefits both you and the surety company to build a strong relationship because it allows you to build your experience and track record for future projects, while the surety company benefits by having a business that consistently wins projects and needs bonding.
Even if some jobs don't require payment and performance bonds, you will need to get bonded eventually since the majority of public projects do require the bonds. The longer a small contractor waits to get bonded, the harder it will be since there won't be a track record of meeting the necessary requirements for bonding and performing bonded work.
3: Waiving Performance Bonds Puts Taxpayers at Risk
As mentioned above, payment and performance bonds protect the public. If a contractor defaults on a job that isn't bonded with performance and payment bonds, the taxpayers will end up paying for an entirely new contractor to come in and complete the job. On the slip side, if a contractor defaults on a bonded project, a claim can be filed on the performance bond to pay for a new contractor to get the job done.