What is a Bid Bond?
A bid bond is a type of contract bond. It serves as a security, and a prequalification measure for a contractor’s bid during a bidding process.
Should the contractor be awarded the bid, the bond is there to guarantee that the contract will be executed at the bid price and under the conditions set forth in the bid. If the contract is not executed according to the bid, a claim against the bond can be made.
A bid bond further guarantees that if the contractor decides to withdraw from the bid after the bid has opened, a claim can be filed against the bond. There are some exceptions to this rule, but only if the contractor can prove that a mistake was made in their bid.
In this sense, bid bonds work like all other surety bonds as agreements made between three parties. The obligee is the party requesting the bond (the project owner or the state), the principal is the party obtaining the bond (the contractor participating in the bid) and the surety bond company is the party issuing the bond, which is also responsible for its financial backing.
Most construction project bids require contractors or subcontractors to obtain a bid bond. Often, bids that are not backed by a bond are not accepted at all.
Bid Bonds and Performance Bonds
These two types of bonds work together and are usually inseparable. All federal and state projects require contractors to obtain a bid bond before they enter the bid and a performance and payment bond once they win the bid. Many private projects, such as commercial or residential building projects, also require bid bonds to be posted.
Bid bonds also serve as an additional guarantee for project owners that a bidding contractor or subcontractor is qualified to execute the job they are bidding on. There are two reasons for this.
Sureties always perform extensive checks on contractors before issuing any kind of contract bond to them. They check their personal credit score, financial standing, project history and other aspects of the company extensively.
In addition, as a rule, sureties which underwrite a bid bond for a contractor also have to underwrite their performance and payment bonds. This way, if a surety is not confident that a bidder can actually execute a certain job, they will not issue a bid bond in the first place.
Issuing a bond to such a bidder places a big potential burden on the surety, if they issue a performance and payment bond afterwards and there is the chance of contractor default. Therefore, sureties only issue bid bonds to contractors they deem reliable and capable.
On the other hand, contractors also benefit from working with sureties which are responsible and experienced. The surety’s check and approval of your company is also a type of guarantee for yourself and the quality of your business.
The status of your surety company is important, because it guarantees you that if you have difficulties or if worse comes to worst you will have a reliable partner to turn to and receive help from. Lance Surety Bonds works only with A-rated and T-listed companies, the most reliable companies in the industry.
Bid Bond Cost
Bid bonds usually cost around $100 per contract.
Keep in mind that the cost of the bid is not the amount of the bid bond. The amount of the bid bond is the amount of coverage that the surety is ready to extend to the obligee. In other words, if a successful claim is made against your bid bond, the surety will cover costs only up to the full amount of the bid bond.
The full amount of a bid bond is determined in relation to the amount of the contract. A bid bond’s full amount usually does not exceed 5-10% of the total amount of the contract.
For example, if the contract you are bidding on is $200,000, the amount of your bid bond will be between $10,000-$20,000. In case of a claim against your bond, the surety will offer backing up $20,000, if that is the final amount of your bond.
Unlike the other contract bonds, bid bonds don’t cost much because of the detailed and extensive check that sureties perform on contractors prior to issuing the bond. When performing this check, personal credit score is among the most important factors that sureties take into account.
How to Get a Bid Bond
All you need to do to get your bid bond is apply online through our easy to use and secure application tool. As part of your application, you will be asked to submit additional documentation about the contract you will be bidding on.
Have questions? Call us at (877)-514-5146 to speak to one of our experts and find out more about bid bonds or receive guidance and advice. Call us!