If a contractor wins the bid but decides not to execute the contract for one reason or another, the client will be forced to award the second-lowest bidder the contract and pay more. In this instance, the project owner can make a claim against the full or partial amount of the bid bond. A bid bond is thus an indemnity bond that protects a client if a winning bidder fails to execute the contract or provide the required performance bonds.
The amount claimed against a bid bond typically covers the difference between the lowest bid and the next lowest bid. This difference will be paid by the bonding company or surety, which may sue the contractor to recover the costs.
Whether the surety can sue the contractor depends on the terms of the bid bond. A contract bid is most commonly associated with a proposal and price submitted by a contractor or service provider to a soliciting firm for a business opportunity involving construction or renovation projects.
While having good credit is always helpful in matters like these, those with poor credit may still be able to obtain bid bonds from companies that agree to do so, but these will often be more costly to obtain. Once a project is successfully completed per the contract, the bid bond amount is returned. The three main types of construction bonds are bid, performance, and payment. Investing Essentials. Loan Basics. Fixed Income Essentials.
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Personal Finance. Your Practice. Popular Courses. Investing Bonds. What Is a Bid Bond? Key Takeaways A bid bond is a legal agreement that ensures contractors fulfill their stated obligations on a project. This form of assurance provides both financial and legal recourse to the owner of the project.
Bid bonds are usually submitted in conjunction with the project's contract. 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. 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. Both circumstances typically happen when a contractor makes a large mistake. The Obligee could then make a claim on the bid bond. 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. 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. A valid defense to a bid bond claim is clerical error or error in transposing the numbers. 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. 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. Many Obligees have moved to electronic bidding. If a project owner wants this information for a contractor, they should request that the contractor get a bid bond instead. Bid bonds are underwritten by the surety and provided only to those contractors who can be bonded for a specific job and amount.
After you win the bid, working with an experienced surety broker provides an edge in obtaining the best pricing on performance and payment bonds. Mark Levinson, Senior Vice President of Surety, has developed strong relationships with the leading surety bond underwriters to provide our clients with access to more favorable terms and conditions.
We work closely with our clients to increase their bonding capacity while staying in line with their expectations for corporate growth. A construction bond, also referred to as a construction or contract surety bond, guarantees to the obligee the party.
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