- INTRODUCTION
A bid bond is a type of financial guarantee used in construction and other project-based work. It is a promise from a contractor to a project owner, stating that if the contractor wins the project bid, they will take on the job at the price quoted. If the contractor backs out or fails to honour the bid, the bond ensures the owner is compensated.
- WHAT IS A BID BOND?
A bid bond is used during the bidding process of a construction or renovation project. It serves as the project owner’s safety net. how is a performance bond different from a labor and materials bond is a common question that arises when discussing bond types. If a contractor wins the bid but doesn’t start the work, the owner can recover financial losses using the bond. This prevents unreliable or underfunded contractors from wasting time and money.
- HOW BID BONDS WORK?
Most public construction jobs require a bid bond. In the event that the chosen contractor is unable to start or finish the job, it safeguards the owner. For example, a contractor with financial problems might back out after winning the bid. A bid bond ensures that only serious and capable contractors apply. Without a bid bond, there’s a risk the project might be delayed or left unfinished. Additionally, bid bonds prevent unqualified businesses from making fictitious or dangerous bids.
- REQUIREMENTS
Usually, project owners ask for 5% to 10% of the bid amount as a bond. For federally funded jobs, this can be as high as 20%. A number of factors, including the size of the project, the location, and the contractor’s background, affect the bond’s cost.
For example, a corporation may require a $50,000 bid bond if it bids $250,000 to build a school roof. To demonstrate their seriousness, they include this bond with their proposal.
- HOW ARE BID BONDS WRITTEN?
Bid bonds are written guarantees provided by a surety company. The surety business investigates the contractor’s credit history, experience, and financial background before granting a bond. The contractor receives the bond and pays a premium if authorized.
- PARTIES INVOLVED
- Obligee – The person who requests the bond is the project owner.
- Principal – The contractor bidding for the job.
- Surety –The business that issues the bond and ensures payment in the event that the contractor defaults.
Both the contractor and the surety are liable if they violate the contract.
- BID BOND VS. PERFORMANCE BOND
A performance bond takes the place of the bid bond after the contractor who won the bid accepts the contract. A performance bond ensures the contractor does the work properly and according to contract terms. If not, the owner can claim money to fix or redo the work.
- WHAT HAPPENS IF A CONTRACTOR BACKS OUT?
If the winning contractor refuses to start the job, the owner may offer
the project to the next lowest bidder, often at a higher cost. The difference can be claimed from the bid bond. The surety may then sue the original contractor to recover the loss.
- CONCLUSION
Bid bonds protect project owners from risks during the bidding stage. They help make sure that only financially stable and serious contractors participate in the bidding process.
