In the construction industry, bid bonds are an important tool to help assure project owners that they are financially stable and have the resources to complete a project.
Bid bonds are typically purchased from 5 to 10% of the total bid amount. These percentages vary by job and obligee (the project owner).
Know the Requirements
Bid bonds are often required on construction projects by state and local agencies that use taxpayer money to fund public works. They are also required for many private jobs to protect project owners from risk.
A bid bond construction is a contract surety bond that must be secured by contractors bidding on a project. It is typically a percentage of the estimated contract amount, about 5-10% of the total contract value.
The parties to the bond are the obligee (the project owner), the principal (the contractor), and the surety. The surety underwrites the bid bond to guarantee financial integrity and backs the contractor’s ability to secure the bid.
Before a surety issues any bid bond, they will perform extensive checks on the applicant’s credit, financial standing, and project history. This ensures the applicant has the capacity and financial stability to execute the proposed job successfully.
Understand the Underwriting Process
Bid bonds are required on most construction projects, especially those paid for with taxpayer money. This bond protects the owner from financial loss if a contractor changes their bid.
In addition, it prevents potential unqualified contractors from submitting a low bid to win the job and then changing the scope of work. This can be costly for the project owner, who must find another contractor to meet their needs.
The surety will conduct extensive financial and background checks on a contractor before issuing the bid bond. They may look at the company’s credit history, years they have been in business, and financial statements.
Prepare Your Financials
Bid bonds are an integral part of the bid process. They form a guarantee between the owner, the contractor, and the surety agency.
Generally, most state and local agencies sponsoring public works projects funded with taxpayer money will require contractors to post bid bonds along with their bids. Private project owners may also opt to do so.
Preparing your financials thoroughly before applying is key to securing a bid bond. This includes breaking down job costs and supporting subcontractor bids and quotes from materials suppliers. It also includes preparing a detailed cash flow projection or forecast.
Submit Your Application
Securing a bid bond for your construction project is as simple as applying to the bonding company. The company will evaluate your application based on your financials and industry experience.
A particular kind of surety bond, known as a bid bond, safeguards the project manager or owner during the bidding process. These bonds stop contractors from offering irrational or unsuitable prices to land a job.
Depending on the assignment and obligee, the bid bond’s amount varies, typically between 5 and 10% of the expected contract price.
These bonds are a form of security that assures the owner that you will carry out the job by the contract you were awarded and supply the essential payment and performance bonds. If you don’t, you risk facing financial consequences. This sum of money may be considerable.