When it comes to public construction, a bid is almost always required so that the government can choose a contractor who can do the project at the lowest price possible. However, the government, or any project owner for that matter, needs to have an assurance that even the lowest bidder has the resources to take the project on. The best way to get that assurance is through a bid bond.
What is a bid bond?
A bid bond is both a written guarantee and a cash deposit. It is a written guarantee because it needs a third-party guarantor that will reassure the project owner of the contractor’s financial capabilities to take on the said project. The third-party guarantor can be a corporate surety firm or an individual surety. Whoever they may be, the guarantor is responsible for checking the financial resources of a contractor. This means they will look at financial statements, past projects’ values, experience, history, past bids, etc.
On the other hand, a bid bond is also a cash deposit because it is submitted in this form when a project owner tenders a bid. This is the formal request made by a contractor to join in the bid.
According to the Miller Act, any contractor interested to take on a federal project is required to pass a bid bond. But because it has become advantageous to the government, some big private projects already require passing a bid bond.
Getting a bid bond is not complicated especially since the contractor does not issue the guarantee themselves. Instead, they go to a surety company or individual to give it to them. See more here on how contractors get a bid bond.
How to Get a Bid Bond
Before approaching a surety company, any contractor should have their financial statements ready. This may sound simple, but to a lot of people’s surprise, there are contractors who do not have their financial statements ready and updated. These documents are essential because they will be the primary basis of the surety company of whether or not they will grant you a written guarantee.
Once the financial statements are ready, the next step is to give the bid invitation letter to the guarantor. Usually, the project owner provides the bid request form and this serves as the bid bond application form. If there’s nothing provided, most surety firms have their own application forms. Most application forms ask the same things:
- How much are you bidding?
- When is the bidding date?
- What are your past bidding experiences?
- How long has your construction company been in the industry?
- What are your past projects?
- How much is your credit score?
These questions are meant to discover more about contractors’ financial capabilities as well as their personal financial history. To increase your chances of getting a guarantee, you can increase assets like stocks and bonds, US securities, and amount of cash. However, not all assets can be useful in securing a guarantee. Most of these assets are non-liquid assets such as estate, machines, and jewelry. In other words, having a large amount of disposable cash still gives a higher chance of getting a guarantee especially in the construction industry.
To add to that, the bigger the project is, the more requirements are needed because a lot more money is needed. Naturally, contractors have a higher risk of defaulting once the project has taken place.
The Difference of Bid Bond and Performance Bond
To some people, bid bonds and performance bonds are interchangeable; however, they are different in many ways.
The primary difference is that bid bonds are given by a number of contractors because more than two contractors usually bid for a federal project. Moreover, a bid bond is given before a project commences. On the other hand, a performance bond is given by one contractor after the bidding is done. This cash deposit serves as the project owner’s protection for when the contractor does not follow through with what was stated in the contract.
In the event that the contractor defaults or fails to fulfill their part of the bargain, the project is given to the second lowest bidder. The same process happens for getting a bid bond and passing a performance bond.