It’s essential to understand the ins and outs of bid bonds as a construction contractor. So, we’ll walk you through the following:
As promised, we’ll start by defining bid bonds before getting into the final details. Don’t be discouraged; we’re explaining it as simply as possible. No tricky jargon here!
Bid bonds are essentially financial promises. They tell the project owner that you’ve submitted a bid for a job in good faith and you intend to commit to the contract at the price you’ve quoted. In other words, bid bonds guarantee the project owner that you’ll proceed with the job based on your proposed contract.
While they’re seen most often in the construction industry, other contract-based business sectors also utilize them.
They aren’t always mandatory, but project owners insist you include one within your bid submission for most competitive bid processes. If you win the job but refuse or fail to enter the contract with the owner, the surety (bonding company) compensates the owner.
The specific compensation amount depends, of course, on the project particulars and your bid. However, the general calculation is as follows:
owner compensation (capped at the bid bond amount) = your bid price – the bid price of the runner up bidder
The Canadian Construction Documents Committee oversees the construction bonding market sector and poses standard bid bond forms for the whole country to use.
When dealing with bid bonds (and other construction bond types), you’ll often come across the terms principal, surety, and obligee. Because of that, it’s worth fully understanding their definitions, all of which you can find below:
Not exactly. Even though some entities like to use the term “bid bond insurance,” they’re different assurances.
To get bid bonds, you must qualify. But to get insurance, you don’t need to qualify; you just apply and choose the policy with the best value for money.
In simpler terms, companies can deny your bid bond application, but insurers can’t deny your application (they just charge higher premiums).
People love to spew legal jargon when explaining how bid bonds work. And yes, we understand the importance of this when dealing with the actual paperwork (we’re a construction bond broker, after all). But, we will strip all that unfamiliar language back for now, so we can ensure you get to grips with the inner workings.
Typically required alongside the bid bond, a consent of surety or surety’s consent is a legally binding document between the surety or bond provider and the project owner (obligee). It formalizes certain aspects of the contract, such as:
The agreement also ensures you complete the job to a satisfactory standard and guarantees full payment for your efforts.
Sometimes, the consent of surety document is used to change the order of work and contract proceedings.
Plenty of contractors require bid bonds. A good example is a mechanic contracted to upgrade an HVAC system in a sports stadium or a general contract building a new city hospital. But other contractors who made need bid bonds include:
The use of bid bonds has boomed in recent years as several provinces decided to re-do their Construction Acts. The first to finish the revamp was Ontario. Here, bid bonds are mandatory on publicly-funded jobs worth over $500,000.
Amazingly, this affected the private construction sector too. Now, many consultants stipulate bid bonds as a requirement under their tender specifications.
Additionally, you’ll need bid bonds if you plan to work with the following types of public owners:
The main reason behind acquiring a bid is to prove to your potential client that your bid is serious and you made it in good faith. It gives them peace of mind that you will go into the contract and do the work for the quoted price.
Moreover, it prevents less-than-qualified contractors or companies from bidding for a project just to win the client and changing the type of work or the price upon entering the deal.
For example, if you don’t honour the terms of your bid, your client needs to find a different contractor to complete the work, resulting in project delays, wasted time, and potentially unnecessary spending. Having a bid bond in place means the surety compensates your client so they don’t lose out.
Even if the project owner or developer doesn’t specify having a bid bond, we’d recommend acquiring one. It signifies your seriousness and boosts your professionalism ten-fold.
Qualifying for a bid bond isn’t easy, but with our guidance, it doesn’t have to be overly burdensome either. Think of it like applying for a credit card or other financial loan; the process is similar. Essentially, you need to prove just two things to qualify:
The stronger your financial climate, the easier you can get bonds. Our experienced brokers at ConstructionBond can help put together a water-tight application to boost your chances of gaining approval for your bid bond request.
Speaking of the application, let us discuss this part of the process in more detail as it’s the difference between denial and acceptance.
You can also read our article on how do I qualify my company to be able to bid on jobs if you would like learn more about the qualification process.
Every bond comes with its own application requirements, so it’s important to ensure you’re completing the correct one before moving ahead.
We won’t lie — it’s a lengthy, time-consuming process. But, that’s only because you and your entire company must be scrutinized to determine whether you can complete the specified project.
To accurately assess your capabilities, you need to supply a variety of information, documents, and details. The specifics can vary from project-to-project and bond-to-bond, but it can include some or all of the following (we’ll let you know beforehand):
Additionally, you can also have a look at our article on how to apply for bid bonds if you would like to take a get a better understanding of the application process.
Alongside these documents, you must complete a bid bond application form that asks for the following information:
Providing all the documents at the beginning ensures the process is as seamless and stress-free as possible.
Upon acceptance of your bid, you might need to acquire other bonds to secure different parts of the project. A plethora of options exist, some of which may apply to your situation, such as:
The bid bond itself is free; there’s no upfront fee or a premium. However, you can’t get a bid bond or any other type of bond without opening a bond facility, which comes with annual charges.
Consider your bond facility as a yearly subscription that grants you permission to take out bonds. The specific cost of this account (i.e., bond facility) depends on a variety of factors, including the following:
Generally speaking, bid bonds are Free. You pay for bonds after you win the job. Usually 1% of the project value. Click here to read a more detailed explanation regarding the cost of bid bonds.
We receive this question a lot, so let’s finally put it to bed — no, bid bonds do not last forever. Like performance bonds, bid bonds expire, but the terms vary depending on the provider.
As soon as the pre-defined time frame ends, the bond needs to be extended or renewed. If you fail to do either, you may face rather negative consequences.
The most important thing to remember, however, is that they expire, and the period is set when you acquire the bond. Not to mention that it’s very unlikely for a bid bond to expire before the project owner reaches a decision or fulfills a contract obligation.
Yes, we just explained that you can renew bonds. But sadly, that’s not always the case. The type of bond and the obligee determine whether you can renew or extend it.
In rare circumstances, renewing your bid bond may become necessary. At which point, it’s vital to know how to go about it.
But let’s talk about fees first.
As you can probably imagine, renewal fees exist — and the responsibility for paying them falls to you (the principal). The charges vary based on your claim history, the surety company, and your credit score. There’s also a possibility of receiving a renewal denial if you fail to meet the initial bond requirements.
When it comes to the process, you’ll be delighted to know that it’s nowhere near as hard as applying for a new bid bond. The surety company still assesses the risks of bonding with you, but you stand more chance of gaining acceptance as they would’ve bonded with you beforehand.
Finding the right bid bonds on your own is hard work — why not let us take the pressure off? At ConstructionBond, we have access to all kinds of bid bond providers, and you’ll benefit from a staggering wealth of industry experience.
Our team helps you from start to finish. We don’t leave you wondering, “where do I go from here?” Instead, we provide full support every single step of the way to ensure you’re in the know at all times.
By now, you’ll know that you definitely should get your hands on bid bonds when fighting for a project, even when it isn’t a mandatory requirement.
But you’ll also understand that you don’t have to traverse these sometimes murky waters on your own. Our team at ConstructionBond is here to help.
From prequalification to success, just get in touch to start the process.