Contractor Bid Bonds

What is a Bid Bond?

Why Are Construction Bonds Required?

Medium to large construction projects carry a lot of risk for the project owner. Typically they are beholden to:

• Financing companies
• Investors
• Business timelines and goals

The project owner has strict requirements for project milestones, financing milestones among a lot more.

The surety bonds involved in a construction project are the primary way project owners hold contractors accountable to the promises they made when they accepted the project.

The bid bond is just one of these bonds and is typically bundled with:

• Construction performance bonds
• Construction payment bonds
  
  

What Does a Bid Bond Protect Against?

As we've mentioned the project owner has strict timelines to hit, especially when getting a project started.

During the bid process, the project owner is accepting bids and vetting contractors to make sure they are the right company to handle the job.

It could be devastating for a project owner to accept a bid only to have the contractor pull out of the project.

This can waste weeks to months or time, plus it forces the project owner back into the bidding process, wasting even more time.

This is why each general contractor is required to submit a bid bond protecting the project owner from a contractor who:

• Submits an extremely low bid they can't follow through on
• Fails to accept a project once selected

Requiring a bid bond is typically enough to prevent contractors who aren't serious or who aren't prepared for the project scope from even submitting their bid in the first place.

The Typical Construction Bond Process

For most projects, the contractor will apply and qualify for the following construction bonds all at once:

• Bid bond
• Performance bond
• Payment bond

While the bid bond is a requirement, it's typically a bonding formality and rarely used by the project owner.

The minute a bid is accepted the contractor's performance bond becomes active for the project.

The construction performance bond protects the project owner until the project is completed.

So if a contractor pulls out of a project after being selected the project owner will make a claim against the performance bond, not the bid bond.

The claim is to financially compensate the project owner for the costs of delaying the project and getting the bid process restarted.

What Is The Bid Bond Amount And Bond Cost?

This can be confusing.

We've seen this many times having helped hundreds of contractors.

The project engineer will typically tell you to get a bid bond for 5% to 10% of the project value.

However, sureties will not underwrite a bond for a percentage of the project value. They require the bid bond to be the full amount of the project.

A surety is the insurance company that underwrites construction bonds.

The good news is regardless of the project size, a bid bond only costs $100.

If you're selected for the project, the $100 is applied to the price of your performance and payment bond.

Remember, once your bid is accepted, your performance bond immediately becomes active for the life of the project.

So during the process of getting your bid bond, you'll also go through the process of getting your performance and payment bonds.

Getting Your Performance And Payment Bond

Read our article about construction performance bonds to learn the details of each step, but at a high level the steps to get a performance and payment bond are:

Step 1 - Credit Check And Contractor Application

The owners for the company will need to have a credit check performed, plus complete an application outlining the details and scope of the project.

Step 2 - Personal And Business Financials (Conditional)

Depending on the credit check, the project, and the experience of the business, the owners may have to submit personal financial statements.

The business will also have to submit a profit and loss statement as well as a balance sheet.

Step 3 - Construction Bond History

You will need to outline the history of your company's construction bond experience. This is mainly to check for successful projects as well as any previous claims against past bonds.

Step 4 - Conditional Required Collateral

Finally, depending on the above three steps some sureties will require collateral to qualify for the performance and payment bonds.

Again, if you win the project bid, the $100 you pay for the bid bond will be applied to the cost of your performance bond.

Start The Process By Requesting Pricing

Start the process by completing our online quote form.

Tell us about the project and make sure you have the following information ready to ensure the bonding process goes smoothly:

• Have access to business owner information ready
• Make sure you have the full scope of the currently project available
• Even though you may not need them, have in-house profit and loss and balance sheet prepared
• Have your bond history ready because this can help you achieve a lower rate
• If you know you have poor credit or the project is your first of a substantial nature, be prepared to offer collateral