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What is a Bid Bond? | A Guide for Construction Contractors

Updated: Nov 5, 2023

Are you a contractor who wants to bid on public construction projects but isn't sure what a bid bond is or how to get a bid bond? Look no further!


What is a Bid Bond?

Bid bonds are a crucial part of the bidding process in the construction industry. They show the project owner (known as the obligee) that the contractor (known as the principal) is qualified and capable of doing the job at the price they bid. This gives the project owner peace of mind and ensures that they won't waste their time with contractors who aren't serious about the project.


Simply put? Bid bonds show bid integrity in that the contractor (the principal) will do the job at the price they bid to the project owner (the obligee).


The bid bond itself is simply a legally binding document signed by both the principal (contractor) and the surety agency that lists the bid bond guarantee amount to be held by the obligee (project owner) and is submitted along with the bid proposal.


For example, let’s say the principal (contractor) was bidding on a $500,000 public swimming pool project and there was a 10% bid bond required to be submitted along with the bid proposal. Instead of handing over a $50,000 check (10% of the $500,000 bid amount) to the obligee (project owner) to hold as a deposit for the duration of the bidding process, the pre-approved principal (contractor) can simply obtain a bid bond from their surety agency in that amount to submit along with their bid proposal.


As long as the contractor honors their bid proposals and doesn’t back out of their agreed-upon bid amount, the full bid bond amount (also known as “bid security”) will be returned in full.


But if the contractor doesn’t honor their bid proposal, the project owner is legally entitled to keep the full bid bond amount as compensation and the contractor will have to pay the full dollar amount back to the surety bond company (to learn more about how surety bonds work, read this article).




Who Requires Bid Bonds?

Bid bonds in construction are pretty common but not all obligees (project owners) require them. All federal government projects valued over $100,000 require that contractors are bonded in order to be awarded the contract and most state and local governments have similar requirements. Private owners can also require that contractors obtain a bond before they will award the contract.


For example, say the City of Kansas City, MO (obligee) needs asphalt improvements made to Euclid Ave. They put out a request for proposals (RFP) and require all contractors to submit a bid bond with their proposal. If a contractor doesn't submit a bid bond, they automatically get rejected from consideration. This ensures that only serious and qualified contractors are in the running for the project.


How to get a Bid Bond?

So, how do you get a bid bond? The first step is to find a reputable surety bond company that offers bid bonds. Before choosing a surety agency, it’s important to ask the following questions:

  • Does this surety company specialize in working with construction companies? There are many surety companies that don’t specialize in the construction industry and won’t be able to provide valuable insights to your industry-specific needs and questions. Working with a firm that specializes in the construction field will give you a competitive advantage and can make the difference between getting approved for an important bonded project, or not.

  • Does this surety company give me direct access to an experienced surety agent who will personally handle my account? Don’t settle for a surety agency that doesn’t give you personalized service or direct access to an experienced surety agent. When you have questions, the last thing you want is to be on hold waiting to be assigned to someone who isn’t even familiar with your company.

  • Does this surety company offer hassle-free quotes? Just like you would shop around for different rates when getting a mortgage or auto loan, it’s smart to get a quote from surety agencies on their rates, too. If a surety company isn’t willing to provide you with an honest and hassle-free quote, we’d recommend steering clear.

  • Does this surety company have great reviews from other clients? Last but not least, hearing what other people have to say about the surety company is an excellent way to learn more about them and what they offer.


After you’ve found a great surety company that specializes in the construction industry, it’s time to begin the application process! Every surety company will have its own list of questions and required documents but in general, you'll need to provide information about your business, financial statements, and any relevant experience and qualifications.

Once you're approved for a bid bond, the surety agency will handle the bid bond paperwork for you. All you have to do is sign the bid bond document and you can include it in your bid proposal and submit it to the project owner.


What’s the difference between the Bid Bond Guarantee Amount and Bid Bond Premium Cost?


Bid Bond Guarantee Amount

The bid bond guarantee amount is the pre-determined dollar amount that you’ll forfeit to the obligee (the project owner) if you don’t complete your legal obligations.


Typically, bid bond guarantee amounts are 5% or 10% of the total project bid amount (but it can be lower or higher than that and will be stipulated in the bid bond requirements of the RFP).


For example, if the project owner stipulates a 5% bid bond is required and your bid amount is $250,000, your 5% bid bond holds you liable for the amount of $12,500.


Bid Bond Premium Cost

The premium amount is the fee you pay to your surety agency for any bonds they produce. Great news: most surety agencies don’t charge any fees for bid bonds! Typically, fees are only charged for performance and payment bonds, etc.


Conclusion

Bid bonds are an important part of the construction bidding process. They ensure that only serious and qualified contractors are considered for a project and give the project owner peace of mind. If you're a contractor looking to bid on construction projects, make sure to get a bid bond from a great surety bond company that specializes in working with construction companies to increase your chances of success.


 

Interested in getting a surety bond quote today? The team here at Shorewest Surety would love to help. For the last 20+ years, we’ve been exclusively focused on helping construction contractors get the best rates, expertise, and service possible. We truly care about our client's success and are honored to partner with them and share our bonding expertise so they can bid on the projects that matter most. Give us a call today at (800) 264-1634 and talk with an agent who will give you a personalized quote.



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