If you’re in the market for a construction project, you’ll likely have to go through a bidding process. It means that you’ll put together a proposal and send it to potential contractors, who will then submit their proposals in response.
To ensure that you’re not taken advantage of during this process, you can require potential contractors to provide a bid bond. But what is a bid bond, and how does it help your business? Read on to know more.
Understanding Bid Bonds
A bid bond is a type of surety bond. It’s an agreement between three parties: the obligee, the contractor, and the surety company. It guarantees compensation to the bond owner if the bidder fails to begin a project.
- a) Obligee: The party who requires the bid bond. In most cases, this is the owner of the construction project.
- b) Contractor: The bidder who has to provide the bid bond.
- c) Surety Company: The company that issues the bond. It is usually an insurance company. An insurance firm will usually have a surety department that underwrites these bonds.
A bid bond works as an insurance policy that protects the person who issued the bid, known as the obligee, from any financial losses from the contractor being awarded the project. In other words, if the contractor fails to enter into the contract once awarded, the surety company will compensate the obligee for those damages.
The cost of a bid bond is typically included in a contractor’s annual surety account fee. That fee is typical $2,000-$3,000 and covers all bid bonds for the year.
Why You Might Need a Bid Bond
There are a few reasons why you might want to require a bid bond from potential contractors. Here are some of the most common ones.
a) Forbid Bad Bidders
By requiring a bid bond, you can prevent bad bidders from even submitting a proposal. A bad bidder is not likely to complete the project, either because they don’t have the financial resources or because they’re not qualified.
When you have a bid bond in hand, you can ensure that the contractor is serious about winning the project and has the financial resources to complete it.
b) Avoid Delay
Large-scale construction projects may take months or even years to complete. If the contractor fails to begin work after being awarded the project, it can cause many delays for the obligee.
By requiring a bid bond, you can ensure that the contractor will begin work as soon as possible after being awarded the project. It will help to avoid any costly delays.
c) Protect Against Breach of Contract
A breach of contract can happen when the contractor fails to complete the project as outlined in the contract or when they use poor quality materials or labor.
By requiring a bid bond, you can help protect yourself from any damages that might occur due to the awarded contractor not entering into the contract. The bond will help cover the costs associated with repairing any damages.
d) Avoid Lawsuits
A lawsuit involves two or more parties in dispute and deciding to take the matter to court. By requiring a bid bond, you can help avoid any potential lawsuits. It will show that you took the necessary precautions to ensure that the contractor had the financial resources to complete the project.
Tips to Keep in Mind When Using a Bid Bond
Here are some tips to keep in mind when using a bid bond.
a) Make Sure the Contractor is Qualified
Just because a contractor has a bid bond doesn’t mean they’re qualified to complete the project. You still need to ensure that they have the necessary experience and qualifications to do the job.
b) Check the Surety Company’s Background
Once you understand what is a bid bond, you should always check the background of the surety company. Make sure that they are reputable and have a good track record.
c) Get a Copy of the Bond
Make sure to get a copy of the bond so that you can review it in detail. It will help you understand the terms and conditions of the bond.
The Bottom Line
A bid bond helps protect your business from any damages that might occur due to a breach of contract. By requiring a bid bond from potential contractors, you can help ensure they are serious about diligently completing a project.
