When any entity requires a construction project or other contracted service to be provided, it is customary to ask interested parties to bid for carrying out such work. The owner of the project requires some assurance that the work will be carried out as per the bid or negotiated price once the bidder is selected. To ensure this the owner can ask for all bidders to submit bid bonds that act as a guarantee that this commitment will be honored.
A bid bond is important as it acts as a guarantee that a contractor who submits such a bond will accept the contract and perform accordingly if his bid is accepted. It also demonstrates the capability of the contractor who has bid for the project. It gives the owner who has asked for the bids an indication of the contractor’s stability and availability of resources for taking on the project. Bid bonds allow owners to be more comfortable in accepting bids, as they can collect compensation from these bonds in case of defaults. These amounts can be as high as twenty percent of the bid amount.
When you ask for a bid bond, it in a way ensures that only contractors or other agencies who are serious about undertaking the work will submit bids. These bid bonds are available from financial institutions or bond-issuing companies who charge a premium for issuing the bonds. This premium is a cost to the contractor and a further assurance of his seriousness in submitting a bid. This amount is a cost that the contractor will have to bear, immaterial of whether the job is awarded to his bid or not.
Bid bonds can help the selection process as they give the owner asking for the bids the assurance that all the bids received are from serious parties who have the financial and other expertise needed for carrying out the work if it is awarded to any of them. They can also act as a deterrent for any contractor to increase the bid once the contract is awarded. It is often a stipulation in bid bonds that contractors awarded the work will furnish performance and payment bonds required throughout the project.
Premiums charged by companies that issue such bonds can vary and be between 1 and 5 percent of the penalty sum covered by the bond. These agencies will ask for the past performance and financial statements of the contractor to assure themselves that they are solvent and will be able to cover the penalty amount in case of the bond being revoked by the owner. Contractors are constantly bidding for works and bid bonds can often act as a limit to the financial capacity of the contractor to bid for jobs. The premium paid is a cost and cannot be recovered, irrespective of whether the bid wins the contract or not.
Owners can at times not ask for bid bonds and will charge a fee for contractors who want to submit their bids for consideration.