A Guide to Bid Bonds for Contractors

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What is a bid bond?

Bid bonds are common in the construction world. When a contractor bids on a project and wins, the bond provides a guarantee for the project owner or developer. It ensures the project owner that the contractor will follow through by signing the contract as expected.

It assures the project owner that the contractor they select (usually the lowest bidder) will take the project seriously and honor the bid. Bid bonds, like other types of surety bonds, are legal agreements that involve three parties:

  • Obligee (the project developer or owner)
  • Principal (the proposed contractor)
  • Surety (the company issuing the bond)

If the bidder provides a bond and wins the bid, the project owner can rest assured that the bidder has the finances and resources to accept the job and fulfill the project. If the contractor fails to honor the bid, the bond will compensate the owner for having to accept a higher bid. The contractor will then be indebted to the surety company for covering their mistake.

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Quick Takeaways

  • A bid bond is a construction bond that ensures a bidder on a project honors the bid terms and follows through with the project.
  • You may need a bid bond if you plan to bid on a construction job as a prime contractor or subcontractor.
  • In the construction bidding process, contractors will estimate how much they predict the project will cost them to complete and submit a bid for that amount to the project owner. The project owner will typically choose the contractor with the lowest – and most affordable – bid.

What are bid bonds required, and who needs them?

You may need a bid bond if you plan to bid on a construction job as a contractor or subcontractor. They are required for most public projects and many private jobs as well. These bonds provide project owners financial and legal protection.

Without bid bonds, qualified bidders could fail to honor their bids. For example, let’s say a project owner offers you a big job you just bid on. Not only have they carefully considered and selected you as their contractor, but they’ve spent time and money advertising, soliciting, and evaluating other contractors for the project as well. Essentially, bid bonds offer project owners the financial protection they need to confidently hire contractors for a project and hold them to their word.

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Bid bonds don’t just benefit the owners, however. As a contractor, bid bonds can offer you comfort knowing that you are qualified for the work you are bidding. If you can provide a bid bond, your company has successfully passed the underwriting criteria for the job you are wanting to bid. Developing a good relationship with your surety representative can help you evaluate if that job would be a good job for your company.

How do bid bonds work?

You may need a bid bond if you plan to bid on a construction job as a contractor or subcontractor. They are required for most public projects and many private jobs as well. These bonds provide project owners financial and legal protection.

The Reason for Bid Bonds

The purpose of a bid bond is to prevent a contractor from submitting a frivolous bid (when they aren’t serious about taking the job) or lowballing a bid (just to win the project). It guarantees the project owner that the winning contractor accepts the assignment and honors all bid terms after signing the contract.

The Consequences of Breaking a Contract

If a contractor breaks the contract and pulls out of the process after signing, the owner must find a new contractor (usually the next lowest bidder). The project owner can make a claim on the bond for reimbursement for the difference in cost between the lowest bid and the second-lowest bid or the bond penalty (whichever is lower). The surety company that is jointly and severally liable for the bond will cover the costs. Then the original contractor – who pulled out of the agreement – will indemnify the surety bond company.

Avoiding Bond Claims

To avoid claims on your bid bond, only submit accurate and serious bids. Fulfill the terms of the agreement, and obtain a performance bond to replace your bid bond after you win a bid.

Bid Bonds vs. Performance Bonds

A performance bond will replace your bid bond once your bid is accepted and you agree to take a project. A bid bond ensures that you meet the obligations of your bid bond. A performance bond ensures you perform the project according to the contract’s terms and conditions. If your work isn’t up to the agreement’s standards, the project owner can file a claim.

What does a bid bond cost?

Providing a bid bond is free of charge. Although this may be hard to believe, it’s true. Costs associated with bid bonds are only relevant if you win the bid. You would then have to pay for your performance bond.

A contractor (or another prospective bidder) pays a surety agency a set price for a performance bond. The cost of the performance bond depends on the amount of coverage needed – called the penal sum. This amount is how much the surety will cover for damages.

A penal sum on a bid bond usually ranges from 5-20% of the total bid amount and the penal sum on a performance bond is 100% of the contract amount. A non-federal project owner often requires 5-10% of the project cost as a penalty sum for a bid bond. A federally funded project will be 20%.

The cost of a performance bond depends on four main factors:

  • Project amount
  • Experience of the contractor
  • Quality of financial presentation
  • The contractor’s credit and financial history

The cost of a performance bond will typically be 1-5% of the penal sum. If you are awarded a bid of a $100,000 project you would need to pay for a performance bond of $100,000, that price could pay between $1,000 and $5,000 for the bond.

Get a Bid Bond in Your State

To get approved for a bid bond, you must pass the bond underwriting process. This process may involve filling out a form, signing the bond, and delivering it to the party requiring it. Start the process online today, and we’ll help walk you through each step toward obtaining your bond as quickly as possible.

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About ZipBonds.com

Founders Ryan Swalve and Zach Mefferd formed the vision for ZipBonds.com when they realized how overly complicated it was to help clients place surety. The frustration of being unable to incorporate the technology they’d used in other insurance-focused projects left them thinking “there has to be a better way.”

Fast forward a couple of years, and that better way is the impetus of everything we do at ZipBonds. We constantly look for innovative ways to improve the bonding process for our clients and agents. Our team comprises individuals who understand all angles of surety – for companies, agencies, and individuals. Incorporating everyone’s point of view to improve the process while simultaneously integrating cutting-edge technology is what sets our business apart.