Bid Bonds for Contractors and Tradesmen
Bid bonds are considered Surety Bonds and are generally needed when public and municipal entities contract for work that exceeds $25,000, although that amount may not be accurate in every jurisdiction. Bid Bonds are used in public contracts to protect the public (also the owner) from the costs and consequences of considering your bid for work that the Owner has to offer. The Bid Bond helps the owner have confidence that you are qualified to do the work, that you have thoroughly considered the work requested in the specifications, that you won’t back out of your bid once the bids are finalized, and that if awarded the work, you will undertake the work at the price you estimated and bid. A Bid Bond also is a signal to the Owner that you are qualified financially since most bond issuing companies won’t offer a Bid Bond unless they are also willing to issue a performance bond.
Generally speaking, unless specified to the contrary, Contractor Bid Bonds are issued at 10% of the full bid price of your submission or the negotiated full contract cost after a contract with you is awarded. Since a performance bond is required for the work you are bidding on you should be pre-qualified for the performance bond up to the amount of the work you are expected to complete. However, after being pre-qualified for the performance bond, Bid Bonds are easily available for work you intend to do. Bond Underwriters are cautious as to the total amount of work you bid on so it is suggested that when you begin bidding on work that you bid conscientiously because the total amount of work you are seeking is considered when a bond underwriter offers a Bid Bond. In other words, don’t overspend your performance bond by bidding on more work than you can handle. Our most common advice is to start bidding on smaller jobs and complete them successfully. As you demonstrate the ability to bid accurately, win work, and complete it on budget and on time, you will earn the trust of the bond underwriter to more freely offer you higher and higher bid bonds, and consequently, a greater limit for your performance bonds.
The cost for a Contractor Bid Bond is usually $100 per bond and in most cases $250 or less for all bonds needed in a calendar year. The fee fore the bid bond is a fully earned fee to qualify you bid bonds for that year. A new fee is due for the next year. Most bond underwriters re-evaluate your financial statements and position every two or three years, or more often when indicated by results or events. Almost all bonds are guarantees of financial performance so business credit and the credit of principal owners are considered in the establishment of a bond and bid limit. Some companies offer easy bond qualification programs that are usually capacity limited to $100,000 to $300,000 of maximum bond amounts. Higher limits are more thoroughly underwritten and subjected to more stringent underwriting requirements and the appetite for each bond writer differs from one to another.
The standard of the industry today for projects were federal money is a sizable portion of the funding, the Miller Act guides the requirements and specifies that all bidders submit their bids with a bid bond. This practice has leaked into private project construction bidding and today almost all project owners and property developers have developed specifications to require you to submit a bid bond.
Companies writing surety bonds must meet certain financial requirements. Insurance companies produce a statutory report of their financial condition at least once a year and an image of this statement (summarized) is often required by the Obligee to verify that the Surety meets minimum conditions. Their statement is referred to as Certificates of Authority. The United States Department of Treasury produces a circular 570. This circular changes periodically so follow the link to view qualified sureties for federal projects. One other note here. It is not necessary that the surety be an insurance company but most of them are. Individuals that can meet the qualifications may be acceptable sureties for federal projects.
Here is an example of a Bid Bond Example from Hamilton County, OH. Every jurisdiction may dictate a different form of bid bond.