Have you ever wondered what bid bonds are and why construction companies use them? They are a type of surety bond required to bid on a construction project. The bond aims to protect the project’s owner from loss if the contractor awarded the job does not fulfill their obligations.
In order to obtain a bidbond, the contractor must first find a surety company willing to provide the bond. The company will then investigate the contractor to determine if they are financially and technically capable of completing the project. If the company determines that the contractor is likely to default on the contract, they will not provide the bond.
This post will provide an overview of everything contractors need to know about bid bonds, from how they work to their benefits.
The Importance of a Bid Bond
Contractors looking to win a construction project will often submit a lower bid than their competitors. The low bid is an offer to the owner to complete the project for a certain price. The owner will then award the project to the contractor that submitted the lowest bid.
However, the owner needs to be sure that the contractor that submitted the low bid will be able to complete the project for the price they have offered. This is where a bid bond comes in.
The surety company guarantees that if the construction company is awarded the project and fails to fulfill its obligations, it will cover any losses incurred by the owner up to the bond amount.
What does it cover?
It typically covers three main areas:
- The bid price – If the contractor is awarded the project and fails to complete it for the bid price, the company will make up the difference.
- The completion date – If the contractor is awarded the project and fails to complete it by the completion date, the company will pay any liquidated damages specified in the contract.
- The performance of the work – If the contractor fails to perform the work by the contract specifications, the company will pay for any necessary repairs to bring the work up to standards.
There are several benefits that it can provide to both contractors and owners.
- They ensure that the builder is financially capable of completing the project.
- They protect the owner from having to pay for any cost overruns due to the contractor’s financial inability to complete the project.
- They provide the owner with a guarantee that they will not default on the contract.
- They give the owner peace of mind knowing that the project is fully protected financially.
- They allow the builder to focus on the project rather than worrying about financial matters.
- They provide the owner with greater flexibility in choosing a builder, as they are not limited to only those who can give a personal guarantee.
- Lenders typically require them to protect their investment in the project.
- Public entities, such as municipalities, often require them to protect the taxpayers’ money.
As a contractor, it’s essential to understand the role bid bonds play in construction. It ensures that builders can fulfill their obligations and complete the project as specified in the bid. While surety insurance is not required in all situations, it is commonly requested by project owners and should be considered when preparing a bid.