It might not be obvious why construction project owners require bid bonds, but there is a very simple rationale behind this. In most projects, contractors are chosen through the process of bidding. Unfortunately, some choose to bid too low in order to win. Once they win, they suddenly either back out or change their cost at the last minute. This means that owners end up with a higher cost or worse, without a contractor at all.
The risk is high given that many contractors are going out of business and even municipalities are going bankrupt. There is nothing worse than seeing a construction project that is stopped right in the middle, leaving it unfinished. This is the reason why project owners are looking for protection, an assurance that the contractor will have the financial capability to finish the job.
History Of The Bid Bond
In federal projects, bid bonds are required by law. This came about during the end of the 19th century when many contractors were going bankrupt before the project was completed. This is why in 1894, Congress passed the Heard Act, authorizing the use of bid bonds on projects funded by the federal projects. This was updated when the Miller Act was updated in 1935. This stipulates that bid bonds are mandatory for all bidders on every federal project. Nowadays, private firms have also adopted this requirement for their construction projects.
How Do They Work?
Contractors who want to bid for a construction project will need to look for a surety company that will issue them a bid bond. For some more information on companies who offer bid bonds, go to https://swiftbonds.com/bid-bond. When they submit their bids, this should also be presented at the same time. The bid bond assures the project owner that the contractor who wins the bidding process will take the job under the terms they specified on their bid.
A bid bond will require a cash deposit, which they will forfeit when they back out or change any terms of their bid. It will range between 5 and 10% of the contract amount, depending on how big the project is. If they sign the contract at the amount they specified, then they will receive their deposit back. Contractors who do not win the project will get their bid bonds or cash deposits after the opening of the bid or once the contract is signed.
The bid bond assures that project owners will recover any costs incurred if the winning contractor backs out. The surety company will pay them the difference between the 2 lowest bids.
The Purpose Of Bid Bonds
Owners minimize the risk during bidding by requiring a bond. It will protect them from contractors who submit frivolous or unrealistic bids because they will be under obligation to push through on their bid or pay the bond premium.
Moreover, surety companies will do a check of all contractors who want to submit a bid. They will look at their financial records to make sure they are stable enough to fulfill the contract and see the construction all the way to the end. When they back the bid bond, they take on the risk so they have to make sure they are serious contractors.
Unfortunately, some contractors who are newer might find it difficult to get bid bonds, or might have to make bigger deposits due to the lack of experience. However, the Miller Act allows them to post a 20% cash deposit in lieu of the bid bond. Even for bigger, experienced contractors, it is very hard for these contractors to bid on a few jobs because they will not be able to provide the deposit for all of these bid bonds.
Still, bid bonds fulfill their purpose of weeding out contractors who are not serious or capable of finishing the project or even signing the contract. In the end, it is in the interest of all parties when bid bonds are required so that the construction is finished with no hitches whatsoever.