Construction Bid Bonds

At Surety Bonds Agent, we offer a full range of surety bonds nationwide through an extended carrier network. Continue below to learn about construction bid bonds and request an online quote. If you have additional questions or want to explore bonding solutions for your business, speak with one of our knowledgeable surety bond experts.

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What Are Construction Bid Bonds?

As the name suggests, bid bonds are surety bonds that are required from contractors bidding on certain construction projects. Choosing the right contractor for a large construction project can take a lot of time and effort, from putting together the RFP or RFQ, holding bidders’ conferences, reviewing and evaluating bid packages, putting together a contract, and so on. So it’s only natural that many project owners require bid bonds to ensure that:

  • The winning bidder will accept the job if it is awarded to that contractor
  • All bidders are capable of obtaining a performance bond if awarded the contract
  • The project owner has a way to collect damages if neither of the above turn out to be true and it becomes necessary to repeat the process and select another contractor for the job

Who Needs Them?

Purchasing a bid bond is a mandatory step in bidding on many large taxpayer-funded projects.  Increasingly, private project owners are also requiring bid bonds, for the same reasons that public project owners do.  

The required bond amount, also known as the bond’s “penal sum,” is determined by the project owner. This is the maximum amount that will be paid out on a valid claim.

How Do They Work?

A bid bond is a legally binding contract among three parties known as the “obligee,” the “principal,” and the “surety”:

  • The project owner requiring the purchase of a bid bond is the obligee
  • The contractor bidding on the job is the principal
  • The company guaranteeing the payment of claims is the surety

If the principal violates any of the terms of the bid bond agreement, the obligee can file a claim against the bond and be compensated for the resulting financial loss, up to the bond’s full penal sum. 

The principal is legally obligated to pay valid claims against the bid bond, and the surety guarantees that any claim the surety determines to be legitimate will be paid. Consequently, the surety typically pays a claim initially and is then reimbursed by the principal. That payment made on the principal’s behalf does not relieve the principal’s obligation; it merely shifts it from paying the claimant directly to repaying the surety.

What Happens if a Claim is Filed?

If the winning bidder turns down the contract, the obligee will submit a claim against the bond to recover any financial loss that results from the contractor’s decision. A new RFP or bid solicitation may need to be created. And time is money in such matters. 

Once a claim is filed, the surety will investigate to determine whether it is valid. The surety will pay any claim that it finds valid and will then seek repayment from the contractor.

What Do They Cost?

The premium the principal will pay for a bid bond is a small percentage of the bond’s penal sum, that percentage being the premium rate. The surety decides what the premium rate will be after careful consideration of the risk involved in extending credit to the principal. The best measure of that risk is the principal’s personal credit score. A high credit score indicates a low risk that the principal won’t repay the surety for claims paid on the principal’s behalf, so the premium rate will be low. On the other hand, a low credit is a sign of higher risk to the surety, which warrants a higher premium rate.

With good credit, the premium rate for a bid bond could be as low as 1%, while someone with lesser credit could pay a premium rate as high as 15%.

At Surety Bonds Agent, we offer a full range of surety bonds nationwide through an extended carrier network. Continue below to learn about construction bid bonds and request an online quote. If you have additional questions or want to explore bonding solutions for your business, speak with one of our knowledgeable surety bond experts.

CONTACT US FOR A

FREE CONSTRUCTION BID BOND QUOTE

What Are Construction Bid Bonds?

Construction bid bonds ensure the low bidder will move forward on a contract and shows they are qualified.

Choosing the right contractor for a large construction project can take a lot of time and effort, from putting together the RFP or RFQ, holding bidders’ conferences, reviewing and evaluating bid packages, putting together a contract, and so on. So it’s only natural that many project owners require bid bonds to ensure that:

Purchasing a bid bond is a mandatory step in bidding on many large taxpayer-funded projects.  Increasingly, private project owners are also requiring bid bonds, for the same reasons that public project owners do.  

The required bond amount, also known as the bond’s “penal sum,” is determined by the project owner. This is the maximum amount that will be paid out on a valid claim.

A bid bond is a legally binding contract among three parties known as the “obligee,” the “principal,” and the “surety”:

  • The project owner requiring the purchase of a bid bond is the obligee
  • The contractor bidding on the job is the principal
  • The company guaranteeing the payment of claims is the surety

If the principal violates any of the terms of the bid bond agreement, the obligee can file a claim against the bond and be compensated for the resulting financial loss, up to the bond’s full penal sum. 

The principal is legally obligated to pay valid claims against the bid bond, and the surety guarantees that any claim the surety determines to be legitimate will be paid. Consequently, the surety typically pays a claim initially and is then reimbursed by the principal. That payment made on the principal’s behalf does not relieve the principal’s obligation; it merely shifts it from paying the claimant directly to repaying the surety.

If the winning bidder turns down the contract, the obligee will submit a claim against the bond to recover any financial loss that results from the contractor’s decision. A new RFP or bid solicitation may need to be created. And time is money in such matters. 

Once a claim is filed, the surety will investigate to determine whether it is valid. The surety will pay any claim that it finds valid and will then seek repayment from the contractor.

The premium the principal will pay for a bid bond is a small percentage of the bond’s penal sum, that percentage being the premium rate. The surety decides what the premium rate will be after careful consideration of the risk involved in extending credit to the principal. The best measure of that risk is the principal’s personal credit score. A high credit score indicates a low risk that the principal won’t repay the surety for claims paid on the principal’s behalf, so the premium rate will be low. On the other hand, a low credit is a sign of higher risk to the surety, which warrants a higher premium rate.

With good credit, the premium rate for a bid bond could be as low as 1%, while someone with lesser credit could pay a premium rate as high as 15%.

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