A bid bond is required of a contractor by a project owner as a guarantee that the bidder will enter into the contract if awarded the job. In addition, the bid bond stipulates that the contractor will procure performance and payment bonds in support of the contract to ensure its satisfactory completion.
On average, the bid bond penalty amount is 10% of the estimated project value. Some municipalities allow for a 5% bid bond. Federal construction projects require the bid bond to be issued at 20% of the contract value.
A bid bond or other bid security is required on most public work projects. The Miller Act of 1932 mandates bonding on all Federal construction projects. Most States have adopted “Little Miller Act” statutes on projects funded by City, County, State or other municipalities. In addition, a growing number of General Contractors and Construction Managers require bid bonds from subcontractors to ensure they are qualified to bid a particular job.
In the unfortunate event a contractor fails to enter into a contract and/or provide the required performance and payment bonds, the project owner is entitled to claim rights against the bid bond. The monetary value of the bid bond claim can be either the difference between the contractors bid price and the next lowest bid amount or the full penal sum of the bid bond (5-20% of the contractors bid amount).
A cash deposit, certified check, cashier’s check or money order may be substituted for posting a bid bond, in some cases. Nonetheless, it is not a recommended business practice.
Bid bonds are executed through a licensed surety insurance company. The bonding company acts as an independent third party. As with any dispute, not all bid bond claims mandate a bond payout. If a contractor were to file cash, a certified check, cashier’s check or money order, there is no third-party intermediary to review and mitigate a wrongful claim. Moreover, posting cash encumbers a contractor’s valuable cash resources unnecessarily.
Frequently, project owners have their own bid bond form they require to be executed by the bonding company and contractor. A contractor’s bid may be rejected should the bid bond not be issued on a mandated form and/or there being a mistake made in the execution of a bid bond Such cases can also result in a bid bond claim and the project being awarded to the next lowest responsive bidder.
A contractor’s ability to provide a bid bond reflects their positive qualification through a bonding company’s underwriting process. Both project owners and general contractors are familiar with the general underwriting guidelines a bonding company utilizes for granting surety support. Bonding capabilities provide a contractor a broader avenue to pursue projects.