A bid bond is a form of guarantee which is given by the independent contractors to the project owners. It gives a guarantee that the contractor has the required resources which are necessary to complete the task or the job. In case the job is not completed or is not as per the specifications of the project owner then compensation can be expected. It acts as a protection for the project owner in case the contractor backs out or defaults in his job.
It is important for the Canadian independent contractors to be fully aware of the laws and for them to understand their responsibilities before bidding on any project. Having a bid bond also prevents any frivolous bids by the contractors which they cannot keep because if they win the bid, then they would be forced to complete the job as per the requirements or they would end up paying the bond premiums.
In case the obligations which are mentioned on the bid bond are not met, then the contractor would have to pay the amount of the bond. Most of the times, the contractor who placed the bid which was unfulfilled, would be forced to pass the cost of selecting and awarding a new contractor, which may even be 10-20% of the initial bid. The cost of the bid bond may vary and it depends upon the size of the project, as well as the creditworthiness of the independent contractor and their history and financial credentials.
The large projects may range from around 1-3% of the cost of the total project. In times when it may be difficult for the contractor to win a bid, having a bid bond would improve the chances of their winning. A bid bond can instill confidence in the project owner because it can be used as a competitive advantage against the competitors. It reduces the option of winning the bid by quoting a lower price only. As a contractor, however you should be sure that you can provide all the necessary resources and the financing before you file for a bid bond.
The basics of bid bond
There are typically three parties involved in the bid bond which is the obligee, the principal and the surety. The obligee is the developer or the owner of the construction project which is under bid. The proposed contractor or the bidder is the principal and the agency which issues the bid bond to the principal is the surety. The bid bond is purchased for a set price, like a premium for an insurance policy by the principal from the surety.
Penal sum is the coverage value of the bond and it represents what would be maximum damage which the surety would be willing to cover with the bid bond. The amount of the penal sum in most cases in 10% but can range from 5-20% of the bid amount.
Requirements for a bid bond
As per the Miller Act, all potential bidders are required to submit bid bond for any federal project. Many of the private firms are following suit and copied this trend in order to protect themselves against any possible risk which may arise from the bidding process. As a contractor, if you want to be competitive and successful in the construction industry it is very important to get a construction surety bond for your company and the projects. In many areas, a surety bond is a requirement for obtaining permits and licenses. In fact, almost all of the project owners now require a bond from the contractors who bid in their projects nowadays since they have realized the importance of bid bonds and how it can protect their interests.
The requirement for the Federal surety bonds can be met in various ways:
- An approved corporate surety agency issues surety bonds
- An individual surety which pledges certain defined types of asset issues the surety bonds
- The individuals can act as sureties in order to satisfy the requirements for bonds on federal projects if they have the assets which are acceptable in the necessary amount in order to support the bonds
The acceptable assets may be certificate or cash deposits, stocks and bonds which are traded on the New York, American and other known exchanges, U.S agency securities and more. The unacceptable assets are those which are difficult to liquidate such as jewelry, real estate and more.
How bid bond affects contractors
If you are a contractor, then there will surely be a time when you need to apply for a bid bond. Most contractors however may be familiar with them, but do not understand how they work. The main focus of the bid bond is the protection that it provides the project owner or the developer. Many times when a developer bids out a large or an important project, they may sometimes exclude unbonded bidders.
The main reason behind this exclusion is that the developers’ wants to make sure that the bidders are completely capable of finishing the job as per the terms of the contract. Having a bidder who has the bond is a more suitable option since the surety company will not authorize the application for a bid bond if they find the applicant not fit for it. The process of bonding is quite extensive and thorough and the applicant has to go through tough background checks.
A credit report is also requested by the underwriter to check the credit history of the applicant, through which they can see the credit rating, any late payment occurrences or outstanding debt. The request is approved if the applicant has a high credit rating amongst other things, however having a low credit score does not mean the applicant will not be selected.
Moreover, the bid bond also shows that the contractor is capable and viable for fulfilling their contract and all the terms associated with it. However it does not mean it will guarantee a winning bid but it will certainly improve the chances.
Other surety bonds that the contractor may need to present
- Performance bond
- Labour and materials bond
- Payment bond
- Site improvement bond
- Surety’s consent to agreement
- Subdivision bond
Once the contractor gets awarded the job, they may be required to obtain a performance bond. A performance bond is a financial guarantee that provides protection the the project owner (obligee). A performance bond guarantees the project owner that the contractor that has won the bid will finish the job up to agreed terms and standards.
Think of it this way.. you bid on a $500k job and your bid was successful. The project owner now will want you to get a performance bond for $500k before you start the job. This bond will guarantee that project owner that you will finish or ‘perform’ the job up to to agreed terms and standards which you will review well in advance.
In additon to a performance bond, they project owner may also request a labour and material bond. This is to ensure that you the contractor pays your labour and material costs so that there is no interruption in the completion of the project.
Approval for bid bond
Similar to other formal applications, the process of bid bonds may also be quite time consuming. Most bond companies have a different method of operation, which means that the process time may vary in each company. There are quite a few things which can be done in order to make the process faster though. In order to get the bid bond quickly, you can make sure all your required documentation is ready such as your financial statements, outstanding contracts, professional references and your application form.
You must however make sure there is sufficient time for the bid bond application and for its process and the time to bid on the development project, as there can be delays.
About bid bond brokers
When you are applying for the bid bond, you must learn all the details regarding how it works and what to do. For instance, for the bid bond applications you will be dealing with an agency system, rather than a bonding company. A person who is specializing in different types of bonds is known as a bond broker whom you can connect with. Another way to get yourself bonded is through an independent surety provider. They will guide you through the whole process of the application and give you all possible information and sound business advice throughout the process.
You may have to meet with quite a number of them before you decide on one. This way, you will be more aware of better pricing options and you can decide whom you feel comfortable working with.
Conclusion
If you are a construction contractor in Canada, then you are probably already aware of the bid bond and the need to have it handy before you bid for projects. If you are new to the industry then it is the best chance to learn about the bid bonds and how it can affect you. Not only does it provide the best possible protection but it also helps to increase your chances of winning the bid. Even though you may have the lowest bid but if you are not bonded there are quite a lot of chances that the other bidder with the same price who is bonded will eventually win the bid.
As such, the bid bonds give you a competitive edge over your competition and also gives peace of mind to the developer or the owner of the project that their job is in good hands and of course, it also improves your reputation in the industry amongst various other benefits.
