Bid Bonds: What Is It, Who Needs It, Alternatives and More
If you're in the construction business, then you know that getting a job is only half the battle. The other half is ensuring that you win the bid. To increase your chances of winning, many contractors will purchase bid bonds. But what are they?
Bid Bonds are often requested by companies looking to hire contractors for big projects. The bid bond company wants to ensure that the winning contractor will complete the project. This type of bond is commonly known as a performance bond.
If you're a contractor, you may be wondering if you need a bid bond and what alternatives are available for you. This article will cover everything you need to know about bid bonds.
Understanding Bid Bonds
When a company requests a bid bond, they're looking for assurance that the contractor will enter into a contract for the project if chosen as a winner. This type of bond will guarantee that the contractor does not withdraw their bid subsequent to award.
A bid bond can be made by a third-party guarantor as a guarantee, after which it can be submitted to a project owner or a client.
Why Do You Need Bid Bonds?
Bid bonds aren't required by law, but companies hiring contractors for large-scale projects often want them.
a) Increase Chances of Winning
Contractors often purchase bid bonds as bid security. The requirement is typically included in the tender documents by the project owner. A bid is a proposal to complete a project for a certain amount of money. You're also required to provide a bid bond when you submit a bid. The company issuing the bid wants to ensure that the winning contractor will complete the project.
b) Protects against Fraud
Bid bonds also protect against fraud. The bid as well as the bidders financial documents will have been vetted by a licensed insurance company.
c) Good Credit History
To get a bid bond, you must have a good credit history. A bond is a form of insurance that protects the company hiring the contractor. If the contractor fails to complete the project, the bond company will step in and finish it.
The credit history involves the contractor's past payment history, credit score, and other financial information. The bond company wants to ensure the contractor can pay for the work if selected as the winner.
Alternatives to Bid Bonds
There are a few alternatives to bid bonds that you may want to consider.
a) Performance and Payment Bonds
Performance and payment bonds are similar to bid bonds, but issued once the contract is awarded. This does not provide tender security, but rather, performance security. A performance bond helps guarantee that the contractor will finish the job. On the other hand, a payment bond ensures that the contractor will pay their employees and suppliers.
b) Letter of Credit
A letter of credit refers to a form of credit that a bank issues. It's often used as a payment guarantee. The letter of credit issuer agrees to pay the contractor's supplier if the contractor fails to make a payment.
c) Bid Guarantee
A bid guarantee is a contract guaranteeing that the bidder will fulfill the contract terms if chosen as the winner. It is often used by smaller contractors who don't have a good credit history. It helps to ensure that the contractor will complete the project.
Benefits of Getting a Bid Bond
Bid bonds assure the contracting authority that you are serious about bidding on the project and have the financial backing.
It is imperative in cases where a significant monetary value is associated with the contract. The contracting authority wants to ensure that they are not wasting their time reviewing proposals from bidders who cannot afford to complete the project if they are awarded the contract.
A bid bond guarantees that you will put up a performance bond if you are the winning bidder, so it is in the contracting authority's best interest to accept your proposal.
Bid bonds can be expensive, so they may not be feasible for smaller projects. If you are the low bidder and do not win the contract, you may forfeit the bond. Hence, it would help if you were careful before purchasing one.
Conclusion
A bid bond is a surety bond that guarantees that the bidder on a contract will make good on their offer. The primary aim of a bid bond is to protect the awarding authority from being taken advantage of by a low bidder who might not perform the work as promised.