When a certain project has to be built, the owners do not just assign or name a company to do it for them. They want to find someone who can do it for them at the lowest price without compromising quality. To achieve this, they invite contracting companies to bid for it.
Companies that want to participate in the bidding are required to secure a bid bond in order to qualify as a bidder. During the bidding, the interested parties submit a proposal to undertake the project. They submit a cost estimate for the project. The customer will award the work to the contractor that has submitted the lowest bid.
What is a Bid Bond?
So you could ask: What is a bid bond? A bid bond is one of the requirements in order for a contractor to qualify to bid for a certain project. This bond is an assurance to the project owner that it will be completed according to the terms and conditions of the contract. If the contractor fails, the bid bond will be used by the owner to have the project completed.
Requiring contractors to place a bid bond will protect customers from those companies that might not be able to complete the project because they lack the capability to do so. There were cases of builders becoming insolvent before what they are building is even finished. This served as a lesson to agencies that have establishments to build. Hence, a bid bond has become a prequalifying requirement for all bidders.
This means that all contractors that aspire to be awarded the project have to provide a bid bond. If a winning bidder cannot enter into the contract, the project will be given to the second lowest bidder but the winning bidder will have to pay the difference between his cost estimate and that of the second lowest bidder. The amount to cover the difference in cost will be taken from the bid bond.
How Does Bid Bond Work
For example, Contractor A won as the lowest bidder but did not enter into a contract with the customer. If his cost estimate is $100,000 and that of the second bidder, Contractor B, is $120,000, Contractor A will have to pay the $20,000 difference. This is made possible through the bid bond. This will save the customer or project owner from having to cover the discrepancy between the lowest and second lowest bids.
Bonded contractors have the advantage over those who do not have a bond because during the selection process, project owners will only consider those that are guaranteed to have the capability to finish the project through the bid bond. Bid bonds have a flat rate of $100 to $250 for small projects. For big projects, it is computed as a percentage of the total bid amount such as 10% or 15% of it. This is a convenient way of keeping the confidentiality of all the bids.
Contractors use the services of underwriting companies to come up with the amount needed for their bid bond. To be qualified, they have to provide relevant information. These include your bid amount, the date of the bidding, previous bond record, the number of years that your company has been in existence and your credit score. For a bid amount of more than $250,000, you might be asked to submit more documents to qualify for a bigger bond.
It takes time to process a bid bond but to expedite things, always have at hand all the documents and financial records needed before you apply.
How does a bid bond serve as a guarantee to project owners? If ever a contracting company fails to comply with all the requirements of the contract, the customer can forfeit the bid bond. Likewise, the underwriting company and the contractor can be liable for all the costs that might be incurred due to the contractor’s failure to complete the project.
Aside from the bid bond, the contractor has to provide a performance bond. This is an assurance that the project will be finished at the date specified in the contract.
With these bonds, customers will be protected from contractors that might not have the financial and manpower to finish what they have started. The lowest bidder who can provide the bonds required will be the ones to be awarded the work.