The Infinite Possibilities of Bid and Performance Bonds

If there is one certainty about surety bonds it is that sooner or later they get confusing. It is quite easy to slip through the cracks and never understand what you need for your business and how to get it. The positive thing here is that each bond is strictly specific, so you can choose the right one for your needs. Here are some key points to remember if you are in construction and are about to bid for a job.

What is a bid bond and who needs it?

Let’s say that the principal of the public preschool in your neighborhood decides that it is time to insulate the building.

The construction project undergoes a bidding process, which means that contractors are invited to submit their prices for the job. Needless to say, the contractor offering the lowest price usually wins the bid. It is also required to submit a bid and performance bonds along with your bid. As in most situations, the bond acts as a guarantee that the contractor will follow through with the project as agreed. The contract is a vital part of this agreement and has to be signed and the lowest price initially offered should be honored.

Imagine the following scenario: the contractor who won the bid may decide at some point, for whatever reasons, not to fulfill his obligations and not to undertake the work.
Then the preschool principal can file a claim against the bid bond and demand compensation. The idea behind the bid bond is for the government to insure taxpayers’ money against faulty practices when it comes to public work.

Bid bonds are typically backed by financial and insurance brokers, and the contractor has to pay a small percentage of the full contract amount.

How much does it cost and how does one get a bid bond?

The good aspect to the bid bond is that its cost is minimal. Small and mid-sized accounts are expected to pay up to $100 per bid, while larger accounts are covered by the government and do not need to pay a dime. That’s right. Otherwise, to get bonded is not that hard or time-consuming. As a contractor, you will have to get credit approval as well as the personal finances of the owner and the company. There exists also the underwriting approval equivalent to the project being bonded. Be aware that the bonding companies will laser-focus on your project size and judge it against your previous work. If the one you’re bidding for seems way above your head, then a doubt may arise over your abilities to get the job done on time or with the best possible quality. Do not procrastinate because the underwriting process may drag on for some time.

If you happen to be one of those who applied and were denied by traditional bonding companies, find a broker who has access to collateralized bonding markets. You may end up paying higher rates because they require you to put up collateral against the bond but at the same time may have a larger risk tolerance.

Why do I need a performance bond?

Again, it’s a type of governmental insurance against unprofessional and unfair practices. If John Doe was contracted by the municipality to build a playground on the premises of the municipal recreational center, he has to sign a contract and start working to fulfill it. During the performance of the work, however, his small company goes out of business as it leaves only half of the job done. Moreover, some of it is of very poor quality. The good thing is that John Doe had provided the municipality with a performance bond so the former can assert a claim against it for the cost of the unfinished work and the fixing that needs to be done. The performance bond protects against the contractor’s failure to honor the terms of the contract, but it does not offer protection against subcontractors or suppliers.

What do I pay for a performance bond?

The cost of the performance bond should be included in the bid for the construction project. It may vary in accordance with the total cost and type of work needed to be completed. It is hard to judge beforehand, but it could be anywhere from 1 to 3.5 percent of the estimated cost of construction. Again, if the bonding company deems bonding the contractor as a risky investment, the costs will rise.

Need to post bid and performance bonds? Apply online now or call one of our agents at 866.450.3412  if you are experiencing any difficulties or have any questions!