Bid Bonds

A bid bond is a three-party guarantee between the Principal (The Contractor on the Bond), the Obligee (The Owner or Contractor Requesting the Bond) and the Surety (Bond Company Guaranteeing the Bond)

The bid bond guarantees that if the contractor is the low bidder, they will enter into a contract for the price and terms of their bid. The bid bond protects the Obligee and compensates them for costs associated with rebidding a project if the Principal does not enter into the contract.

A secondary purpose of a bid bond to prequalify contractors and make sure they are a capable and responsible bidder. This is required by many construction contracts.

Bond Penalty

Bid bonds are usually expressed as a percentage of the bid such as 5%, 10% or even 20% on some private jobs. Usually bid bonds are not “capped” so the actual penalty will depend on a contractor’s bid. An example is below:

It is possible for a Surety Bond Company to “cap” a bid bond. This means they will have a maximum bid amount on the bid bond and therefore a maximum bond penalty.

Cost

Cost of bid bonds depends on the surety bond company and broker. MG Surety Bonds does not charge for bid bonds. We want to build a long-term relationship with our clients and issue bid bonds as part of that service.

How to Get a Bid Bond

In most cases, companies with good credit can get bid bonds up to $500,000 freely with a simple application. Larger bid bonds may require additional information and our staff are happy to help you through the process. You can see the process for obtaining a bid bond in the chart below:

Contractors can also learn more about construction bond underwriting and what it takes to get bid bonds here. As contractors grow, they may need more surety bond capacity to take on additional work and to obtain more bid bonds. You can read more about increasing your surety bond capacity here.

What Happens to the Bond After the Bid?

Should you be the successful bidder, the Obligee will likely require you to enter into a contract. At that point, they may ask you to provide Performance Bonds and Payment Bonds.

Should your bid be unsuccessful, the bid bond will simply expire, and you can shred it and move on to the next job. There is no need to have the bid bond returned.

When Would Someone Make a Claim on a Bid Bond?

Bid bond claims are rare. Normally they occur in one of two circumstances:

• When the Contractor (Principal) decides not to enter into the contract for that price

• When the Bond Company (Surety) decides that they will not support performance and payment bonds for the project.

Both circumstances typically happen when a contractor makes a large mistake. The Obligee could then make a claim on the bid bond. An example is below:

Contractor 1 bids a project with a 5% bid bond. The bid is turned in at $700,000. Contractor 2 is the second lowest bidder at $1,000,000. After reviewing their bid, Contractor 1 realizes they made a mistake and left something out. Contractor 1 tells the Obligee that they will not be entering into the contract. The Obligee can then make a claim on the bid bond for $35,000 ($700,000 x 5%) to compensate them for having to rebid the project or go to the next bidder.

Suppose in the example above that Contractor 1 still wants the project at $700,000 and would like to go ahead. Their surety bond company may decide not to support the project. The Contractor must either find another surety bond company who will support the project or the Obligee can make a bid bond claim. You can read all about bid bond claims here.

Defenses to Bid Bond Claims

A valid defense to a bid bond claim is clerical error or error in transposing the numbers. For example, let’s say a material supplier gave you a bid for $50,000 but in your rush to get your bid together, you wrote it down as $5,000. This could be a valid defense to a bid bond claim.

Best practice is to go the Obligee as soon as you know there is a mistake. Regardless or whether there is a valid bid bond claim or not, most good owners and contractors do not want to start a project with someone who is upside down on the project. They may decided that it is best to move on to the next bidder.

Indemnity

Bid bonds are written on The Principle of Indemnity. That means that if a valid claim does happen, and the surety bond company pay a claim, they will seek reimbursement from the contractor any other indemnitors. The terms are normally spelled out in the General Indemnity Agreement which a contractor will be required to sign with the surety bond company before receiving any bid bonds.

Electronic Bid Bonds

Many Obligees have moved to electronic bidding. This is especially true for Department of Transportation projects. The underwriting for obtaining these electronic bid bonds are still the same. Once the bid bond is approved by the surety bond company, the electronic bond is approved in the bidding system.

What to Look for in a Bid Bond Company

The bid documents will outline the requirements for the surety bond company writing your bid bond. Many will require that your surety bond company be rated “A-“ or better by the rating agency A.M. Best.  Contractors should be very suspicious about using a bond with a lesser rating. Most contracts will also require your surety bond company to be listed on the U.S. Department of Treasury’s Circular 570 which you can check here. This is sometimes shorted as a “T-Listing”.