Bid bonds are important as they act as proof of guarantee to project owners. They show that a contractor can comply with the bid contract and act as proof that they can complete the job as stipulated in the contract. These bonds are a guarantee that you provide to project owners stating that you have the capability to take on a project and implement it once the project owner has selected you during the bidding process.
Often, project owners don’t know if the contractor has all the necessary resources to take up a project or if he or she is financially stable. However, with a bid bond in place, they can feel more comfortable when awarding a project to contractors knowing that if a contractor fails to deliver, they can get compensation from the bond.
What Happens When A Bond Obligation Isn’t Met?
If bond obligations aren’t met, the surety, and the principal – referring to the contractor – are held liable for the bond both jointly and severally. Often, there are some penalties that will take effect when the contractor fails to fully comply with the obligations stipulated in the bond. Both the surety and principal will be held liable for any additional costs the project owner incurs when selecting and awarding a different contractor. Normally, this is the difference in dollars between the lowest bid and the second lowest bid. The standard penal sum of most bonds is often 10 to 20% of the total bid amount.
Asking for bid bonds helps project owners sift serious contenders from jokers as it makes it hard for contractors to submit frivolous bids as they would be required to get the work done, or pay for bond premiums. At the same time, companies that issue bonds perform comprehensive financial and credit reviews before providing bonds to a company.
When bidding, most contractors will estimate what a job will cost them to complete. They then submit this cost to the project owner in the form of a bid. This means that the company providing bond will have to pay the project owner the difference between the lowest bid and the next lowest bid. There are times when bonding companies may sue contractors who defaulted to recover these costs. However, the possibility of a lawsuit is usually determined by the terms of the bond itself.
The Miller Act stipulates that all federal project bidders should submit a bid bond before bidding for any project task. Since this is one of the most effective ways to ensure that you get serious people working on a project, many private companies have opted to copy this approach to protect themselves from risks during the bidding process.
As a contractor in the construction industry, it is extremely important that you get surety bonds if you want to be more competitive. In some localities, surety bonds are required for you to obtain permits and licenses. Similarly, almost all developers and project owners will require that contractors submit bid bonds before they can bid on their projects.