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What are the Construction Bid Bond and how do they work?

cif-03Construction Bid bond companies uses these agreements as financial security for contract bid proposals, especially for large projects such as commercial developments.

The main objective of a bid bond is to ensure that the low-bidding Contractor will stand behind the amount quoted in his bid. This keeps the contractor from expanding the bid on the project after entering into a agreement with the developer.

A construction bid bond involves three parties:

Obligee: the corporate or government entity who looks for the financial security of a Bond to ensure that their project is finished by the contractor or construction company for the proposed low bid.

Principal: the contractor who buys the bond to ensure financial integrity.

Surety: the agency who issues the bond to the principal.

Construction bid surety bonds impose that the contractor will safeguard other important performance criteria required all through the project. If by any chance the contractor is not able to finish the work & breaks the contract, as per the bond, the developer (or Obligee) has power to collect damages in the amount of how much more he has to pay to contract the next-lowest bidder for the project. If the contractor cannot cover the expense, the surety will be held responsible for paying reparation up to the bond’s full face value.

It is a non-verbal guarantee from a third party guarantor- which is normally surety bond insurance companies – to a principal (client or customer) by a contractor (bidder). Before issuing the bid bond, the surety will require the contractor to be in good standing: including financial history/stability; experience; supplier references; & banking relationships.

Construction Bid bonds normally require a contractor to provide between 5% and 10% of the bid upfront as a penal sum. Contractors prefer these bid bonds because they are a less costly option & they don’t tie up money or bank credit lines during a bidding option. However, federally-funded projects usually require the penal sum to be 20% of the bid. Moreover, the surety bond company will look for damages from the contractor for any losses. Contractors pay surety agencies a premium to secure a bid bond. Bid bond costs vary greatly due to a number of factors, for example, the bid amount, contract terms, & the jurisdiction in which the contract is executed. Normally bid bond premiums are between 1% and 5% of the penal sum.

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This post first appeared on Bid Bonds For Construction Projects, please read the originial post: here

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What are the Construction Bid Bond and how do they work?


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