What are Bid Bonds, and How Do they Work?

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If you are a contractor and have been working in the construction industry for a while, you would be familiar with the term “bid bond.” A project owner requires a contractor to have this document during the tender stage to avoid facing the cost of a re-tender if the contractor backs out of a project for being a low bidder.

Without this document, the owner might not allow you to bid on a project. But what are bid bonds exactly, how do they work, and what are some other things worth knowing about them? Find out in this article.

Bid bonds are financial instruments

A bid bond is a document guaranteeing the project owner (the obligee) that the contractor (the principal) will respect the terms of the contract and enter into it after they win the tender, despite being the lowest bidder.

Which companies require these bonds?

Different types of businesses require these bonds, including construction companies. General, electrical, road paving, heavy civil, and snow removal contractors also require these bonds. Public owners such as school boards, defence construction, the ministry of transportation, and hospitals also need these bonds.

How much do they cost?

Typically, a bid bond is 10% of the total contract price because it assures the project owner that the contractor would complete the job on time and was the right person to be awarded the contract.

Some owners ask for a bond between 5% to 15 % of the contract price or an amount that adequately covers them. Bid bonds also come with a surety fee, which ranges between 1,500 to 3,000 CAD.

Things surety companies look for before issuing bonds

A surety company will look at various items while providing bid bonds. They look at the business’s capital, the owners’ character, and the company’s capacity to execute the work.

  • Capital: The total amount of money borrowed by a contractor or firm (or group), the owner’s net worth, and if they can cash flow the project they have undertaken.
  • Character: It refers to the contractor’s ability to complete a specific project, provide timely reporting on the project progress, and reliability of the references they provided while getting the bond.
  • Capacity: It refers to the competence of a contractor to complete the project they have undertaken. While determining their ability to work on a project, a surety company assesses things like accounting systems, project management expertise and tools, and if they have the proper equipment and machinery for the job.

How to obtain a bid bond?

The best and quickest way to obtain a bid bond is to contact an insurance broker or a surety brokerage company specializing in these bonds. Before choosing a company, ask them which surety companies they work with.

Letting a surety brokerage company handle the process is much easier than doing so yourself because they are acquainted with it. They will help you submit the documents and fill out forms such as the bond requisition form. You might also consider asking them the total time it would take to obtain the bond.

The information mentioned above will help you understand the question, what are bid bonds, and how do they work? You will require one before bidding on a project tender, and it’s better to have one beforehand to avoid inconvenience later on. It also establishes your credibility as a contractor.

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