Federal law requires any contractor bidding on a public project to submit a bid bond. This is a guarantee to the project owner that the bidder will sign the contract when he wins the bidding. He will also do it for the exact price he has submitted. Lastly, to fulfill the contract, he will also obtain a performance and payment bond as part of completing the whole project.
Normally, the bid bond should amount to about 10% of the project value estimate. In some municipalities, it might be lowered to 5% but construction projects by the Federal government require much higher bid bonds, at 20% of the value of the contract.
The History Of Bid Bonds
While many private construction projects also require contractors to submit bid bonds, the practice began with Federal construction works. The Miller Act of 1932 has made bonding mandatory on these projects, and local government projects by the State, the City, the County, and even the municipality have adopted this statute on their projects.
This practice is also becoming popular with general contractors or construction managers who hire subcontractors, as they want assurance that they are also qualified and sound to bid for the work.
What Are Bid Bonds For?
A bid bond is a way to protect the project owner from incurring unwanted costs in case the winning contractor backs out from signing the contract. It also prevents bogus contractors whose style is to bid lower than everyone else then raise their price afterward. It can then be a great tool to weed out contractors that might end up being troublesome and unreliable and ensure that the project can be completed without any hitch or delay. This is why more and more project owners, even for private works, have adopted the practice.
It might happen that the contractor does not enter into the contract. He might also fail to submit the performance and payment bonds that are also required. In these cases, the project owner has the right to file a claim on the bid bond. He is poised to receive an amount of money that varies between the difference between the lowest 2 bids, or up to the entire penal amount of the bid bond (or between 5 and 20% of the contractor’s bid).
Bid Bonds Versus Other Substitutes
Bid bonds are issued by surety companies like Swiftbonds. While they offer quick approval for some bid bond applications, they normally have strict parameters they follow before a bid bond is approved. They may also offer different rates that might allow contractors to save a few dollars.
Still, it is easier and much less complicated for them to just use other substitutes like issuing a cashier’s check or even putting down a cash deposit. This is also preferable for contractors who will not pass the check by the surety company due to lack of experience or unstable financial standing.
While this might be possible, it is not to be recommended. Project owners rely heavily on the background check on the contractor, specifically their finances to prove they can see the project all the way through. It lessens the risk of contractors becoming bankrupt in the middle of the project and abandoning it unfinished.
When a cashier’s check is issued instead of a bid bond, the project owner does not have this assurance that the contractor is stable and reliable enough to finish the project. There is no third party looking into the contractor and vouching for them. Moreover, there is no one who will review a wrongful claim. On the side of the contractor, it will be cumbersome to submit such a large amount of money through cash or check.
A surety company is there not to just issue bid bonds to every contractor that requires it. The process of getting it involves a deeper investigation and check on the financial standing and experience of the contractor. They will ask for tons of documentation and review them before any bid bond is approved. On the side of the contractor, he gets someone who will attest to their capabilities and seriousness in bidding for the project. For the project owner, he gains the right to compensation in the event of issues with contractors. In the end, it is a win-win situation for both, which is why a bid bond is still the best way to go.