What are bid bonds?
Bid bonds are common in the construction world. When a contractor bids on a project and wins, the bond guarantees the project owner or developer that the contractor will follow through and sign the contract as expected. They protect project owners legally and financially by holding bidders accountable.
It assures the project owner that the contractor they select (usually the lowest bidder) will take the project seriously and honor the bid. These bonds, like other types of surety bonds, are legal agreements involving three parties:
- Obligee (the project developer or owner)
- Principal (the proposed contractor)
- Surety (the company issuing the bond)
A Deeper Dive into What a Bid Bond Is
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 complete the project. If the contractor fails to honor the bid, the bond will compensate the owner for having to accept a higher bid (the next lowest bidder). The contractor will then be indebted to the surety company for covering their mistake.
Quick Takeaways
- A bid bond is a construction bond that guarantees a bidder honors the bid terms and follows through with the project.
- You may need one if you plan to bid on a construction job as a contractor or subcontractor.
- In the construction bidding process, contractors will estimate how much they predict the project will cost. They will then submit a bid for that amount to the project owner.
- The project owner will typically choose the contractor with the lowest bid.
Why are these bonds required, and who needs them?
If you plan to bid on a construction job, you may need this bond. Many private jobs and most public projects require these surety bonds. They provide project owners with financial and legal protection. Without them, qualified bidders could fail to honor their bids.
An Example
Let’s say a project owner offers you a big job you bid on. They’ve carefully considered and selected you as their contractor. They’ve also spent time and money advertising, soliciting, and evaluating other contractors. The bond offers the project owner the financial protection they need to hire you for a project with confidence.
Benefits
These bonds don’t just benefit project owners. As a contractor, they can offer you comfort knowing you’re qualified for the work you’re bidding on. If you can provide a bid bond, your company has successfully passed the underwriting criteria for the job you want to bid. Developing a good relationship with your surety representative can also help you evaluate if a job would be suitable for your company.
How Bid Bonds Work
You may need a 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 with financial and legal protection.
The Purpose of Bid Bonds
Their purpose is to prevent contractors from submitting frivolous bids (when they aren’t serious about taking the job) or lowballing bids (just to win projects). A bid bond 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 file 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 will cover the costs upfront. Then the original contractor who pulled out of the agreement will indemnify (reimburse) the surety bond company.
Avoiding Bond Claims
Only submit accurate and serious bids to avoid claims. Fulfill the terms of the agreement, and obtain a performance bond to replace your bid bond after you win a bid.
How much do bid bonds cost?
ZipBonds provides bid bonds free of charge. Although this may be hard to believe, it’s true! Costs associated with these bonds are only relevant if you win a bid and need to purchase a performance bond. A contractor or another prospective bidder will pay a surety agency a fixed price (called a premium) for a performance bond. The performance bond cost depends on the amount of coverage needed – called the penal sum. This amount is how much the surety will cover for damages in case of a claim.
Bid Bond Amount
The penal sum is usually 5%, 10%, or 20% of the total bid amount. While these bonds are free, you must qualify for the full amount of your bid to receive your bond. If the bid estimate is below $750k, we can issue the bond without looking at financial statements. If the bid is higher, we’ll need company and personal financial statements, along with a completed questionnaire (we’ll provide the form).
- A non-federal project owner often requires 5-10% of the project cost as a penalty sum.
- A federally funded project will be 20%.
Performance Bond Amount
Performance bonds replace bid bonds. The penal sum on a performance bond is 100% of the contract amount. 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. For example, if you win a bid for a $100,000 project, you must purchase a $100,000 performance bond. The amount you pay (your premium) would be between $1,000 and $5,000.
Bid Bonds vs. Performance Bonds
A performance bond will replace your bid bond once your bid is accepted and you agree to take on a project. A bid bond ensures that you meet the obligations of your bid bond. A performance bond ensures you perform the job according to the contract’s terms and conditions. The project owner can file a claim if your work isn’t up to the agreement’s standards.
Frequently Asked Questions
The three main construction (or contract) bonds are bid, performance, and payment. Other common construction bonds include supply bonds and maintenance bonds.
Yes, you may still be able to get your bond if you have a low credit score. We’d love to talk with you if you have any questions or concerns. Give us a call at (888) 435-4191 to speak with an agent.
Applying for a Bid Bond
You must pass the bond underwriting process to get approved when you submit your bid bond request. This process involves filling out a form, signing the bond, and delivering it to the party requiring it. Start the process online today to obtain your bond as quickly as possible. Or call us at (888) 435-4191 to work with an agent and get bonded in a zip!
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.