A bid bond is something that is required of all projects, specifically, construction and public service projects. In a few short words, it is a type of insurance, although it’s strictly not an insurance product, that ensures a company that wins a bid will complete the project according to product specifications.
A bid bond, also known as a surety bond, essentially tells the project owner that you are capable of completing a project. Private construction projects are not required to have a surety bond in place, unlike public service projects where winning bids are required to post a surety for projects that are worth at least $100,000. But even though they are not required in the private sector, most project owners are not comfortable awarding projects to contractors who do not have surety bonds.
This has led to the growth of an entirely different industry composed of surety bond companies that are parallel to the building industry. Are you bidding on a project? There are many bond companies out there that can help you. But if you are like most people, though, you are probably wondering how a bid bond works.
It works this way: When a contractor is unable to complete a project, or completes a project but does not do it under the specific terms of the contract, the project owner can make a claim with the surety bond company. It’s all very straightforward, however, the companies providing the bond are never eager to provide bonds. As a matter of fact, they will do due diligence on a contractor’s finances before providing insurance. For example, they check credit ratings and financial statements before agreeing to a bid bond.
How much do surety bonds costs? Well, that really depends on the size of the project. For small projects, it can be between $100 to $250. Large projects, though, require a bit of math to determine their price. For projects over $100,000, the price is typically one to three percent of the total project cost. How much a bidder actually pays depends on their creditworthiness and pastoorlaw.com has more on this.
We mentioned before that surety bonds are required for government public works projects. However, you would be surprised to know that federal surety can be met in several ways. Of course, you can do it through a surety bond company. However, individual private citizens can also act as surety if they meet the requirements and they have cash, marketable assets, and letters of credit. Government agencies can only accept surety in the form of cash, assets, and letters of credit from private citizens providing individual surety.
In conclusion, the business of providing surety bonds for the different construction and public works project is a pretty straightforward transaction, and you will find many surety bond companies out there. You will also find that there are many types of surety bonds out there, depending on the type of project and depending on the financial standing of the company that needs it.