What Is The Purpose Of A Bid Bond And How It Can Benefit Your Company?

As a contractor, there is going to come a time when you will need to apply for a bid bond. There may even be a good chance that you are somewhat familiar with these types of bonds, but do not fully understand them. If you are going to be successful in your business you need to understand the ins and outs of bid bonds. The main focus of a bid bond is to protect a developer or project owner. These bonds are most often only issued during the bidding stages of the project.

When a bid bond is issued, it assures the developer or project owner that the winning contractor will fulfill his or her responsibilities at the agreed price. For instance, a bid bond will protect a customer in the event that the contractor tries to raise the bid after entering into the contract. A Construction bid bond also states that a contractor will apply for other necessary bonds that are required throughout the project. This could potentially include a performance bond or payment bond.

construction site after winning the bid bond


Regulations That Can Affect Bid Bonds

Most surety companies require a bidding contractor to provide a percentage of the bid up front, before they issue the bond. These percentages can vary, depending on the providence and location of the job site. You should also be aware of the fact that the percentage for federally funded projects will be much higher. Once again, it all really depends on the providence in which you are bidding.


Benefits Of A Bid Bond

When a developer decides to bid out a large or small develop project, they will oftentimes exclude unbonded bidders. The purpose behind this rejection is because the developer wants to ensure themselves that the bidder is fully capable of completing the job per the terms of the contract. A bonded bidder will be a much more suitable option, because the surety company would not authorize a bid bond application, if the applicant is unfit.

The bonding process is very extensive and the applicant is forced to undergo a brutal background checks. The underwriter will immediately request a copy of the applicant’s credit report. This document will entail the current credit rating, outstanding debit, and late payment occurrences. A high credit rating will provide enough proof for the underwriter, giving them the ability to approve the application. Of course, this is not always the case, because even though the applicant has a low credit score does not mean that they cannot get bonded.


Winning Bid

A bid bond will show the developer that the contractor is viable and capable of fulfilling the terms of the contract. This does not necessarily mean that every bonded bidder will receive a winning bid, because the developer will award the winning bid to the contractor with the lowest bid. Developers are also very likely to choose a contractor that they frequently do business with, since they are familiar with their operation.


How Long Does It Take To Get Approved For A Bid Bond?

As with any type of formal application, the bid bonding application process can be quite timely. Every bond company has a unique method of operation, meaning that the process time can vary from one company to another. There are a few things that you can do to speed up the process. By having all of your financial statements, professional references, outstanding contracts, and appropriately completing the application can definitely help.

Always be sure to allot a sufficient lead time for the process, so you have plenty of time to bid on the development project of your choice. To learn about cost of bid bonds and prepare for budgeting, click here.


Learning About Bond Brokers

Trying to secure a bid bond can be a bit more of a detailed process than you may have initially thought. For instance, when it comes to applying for bonds, you are going to be dealing with an agency system rather than the bonding company itself. Surety companies use bond brokers to issue surety bonds. A bond broker is basically just an individual that specializes in different types of bonds, but they must be bonded, in order to operate in the Canadian bonding industry. Truly, your best bet is to avoid the confusion, by sidestepping these groups all together. Instead, you’ll want to work directly with an independent surety provider.

This person will be able to guide you through the application process, provide you with detailed information, and give you solid business advice along the way. You are going to want to meet and speak with several different bond brokers before you decide on one. This will give you more price options, and you will be able to make sure that the broker has your company’s best interests in hand.


What If The Bid Bond Is Broken?

The contractor will be the only person in the contract that can break his or her agreement. This happens more often than you would think. In the event that the contract is broken, the project owner will be able to collect damages in the form of a cash payment. The amount usually depends on the full amount of contract. The contractor, not the surety company will be responsible for these charges, but there will be a few repercussions. The surety company will go after the contractor and demand full reimbursement for the payout.

Sometimes these matters end up in court, in order for the obligee or developer to collect the damages that are due. Regulations in the bonding industry are changing quite often, so it is important to stay informed on these matters. It is crucial for you to do whatever is necessary to fulfill each contract to the fullest.

Contractor defaults job


Other Frequently asked questions regarding bid bonds