Bonding Basics: What Is a Bid Bond and Why It’s Important.

Bid bond explained

What is a bid bond?

A bid bond is a type of surety bond that helps protect the contractor from change orders. It ensures the obligation to complete the project, for which the contractor has been paid in advance. The contractor must post a bid bond before bidding on a project. 

Bid bonds are typically smaller than performance bonds and less complex. While they offer lower security to the owner, they provide greater security to contractors because they’re less complicated and cost affordable.

Bid bond and liability 

The contractor posts a bid bond to guarantee that the project will be completed. The contractor is paid for his work before he begins construction and in advance of incurring liability. With this type of bond, he’s protected from liability in the case of a change order or other unforeseen circumstances.

For example, if a contractor is hired to build a new house, he’ll post a bid bond by taking out an insurance policy. This bond guarantees that he will complete the project even if something changes mid-way thru, like a change order due to an unsatisfactory structural design discovery. If the discovery causes him to spend more money, he can’t turn back on his contract because he had already received payment in full before beginning any work.

As the owner of the home, you’ve ensured that your construction company has enough money upfront to complete the job without turning back on their contract or going into bankruptcy.

Bid bonds and owners 

A bid bond is a type of surety bond that helps protect the contractor from changing orders. It ensures the obligation to complete the project, for which he or she has been paid in advance.

Owners use bid bonds as a way to guarantee that contractors will be able to finish projects on time and within budget. Contractors also benefit from bid bonds because it gives them greater protection against change orders or changes in the scope of work required by the owner.

In most cases, if an owner wishes for a project to be changed, they need approval from the contractor first. This is where bid bonds come in handy. Since the contract includes conditions about how bids can be altered, it’s easier for both parties involved when changes can happen with agreement rather than disagreement. In essence, while bid bonds don’t offer as much security as performance bonds, they provide better protection for contractors because of their simplicity and affordability Performance bonds traditionally require higher amounts of money upfront and have more complicated requirements that can scare away some contractors who might otherwise have been interested in bidding on a project.

Bid bonds and contractors

Contractors are required to post a bid bond before bidding on a project. The bid bond is a type of surety bond that helps protect the contractor from change orders. It ensures the obligation to complete the project, for which the contractor has been paid in advance.

The purpose of a performance bond is to guarantee that all the work contracted will be completed as promised and, if not, that there is someone else who will pay for it. Contractors can use bid bonds as a way to make sure they get paid upfront without having to wait until the job is done for payment.

Why is a bid bond important?

It is a type of security that proves an individual or company has the financial resources to complete a project. It is typically required when bidding for a construction project, before being awarded the contract. A bid bond requires less collateral than a performance bond but offers more security to contractors. They are also less expensive than performance bonds. For these reasons, it’s important for contractors to have these types of bonds in place when bidding on projects.

If, after winning the contract, the contractor fails to satisfy any of their obligations, they forfeit their bond. This ensures that contractors will deliver on their obligations, even if they do not have adequate funds at the time of commencement of work or completion of work. The bidder’s bid bond should be equal to or greater than the initial cost of construction and should equal 10 percent to 20 percent of the total contract price. If not, there may be repercussions for defaulting on the project and losing out on future bids.

What is bid bond in procurement?

They are a type of security deposit required by the government on some procurements. They help ensure that bidders follow thru with their bids, helping to avoid situations where contractors “bid” without intending to contract. They may be required for construction projects over KES 1,0000,000 and other types of contracts, such as repairs and alterations on public buildings worth more than KES 2,500,000. The Government Accountability Office estimates that bid bonds for federal contracts total about KES 100 billion per year.

Bid bonds can be refunded if a bidder withdraws its offer before the award is finalized and it is not in default on any other contract. For example, if a company has an outstanding bid bond for a particular contract and gets awarded another contract of the same value, the bidder can get reimbursed for that bond amount.

Are bid bonds refundable?

A bid bond is not refundable, but it does help protect the contractor from change orders. If the owner wants to make changes to the project after it’s been completed, they can submit a change order request for up to 10 percent of the contract price. The contractor must agree to do this work even if it means that he or she cannot be compensated for their original work.

How to get a bid bond

There are many ways to obtain it. One option is to contact your state’s surety department and inquire about purchasing one. If you don’t want the hassle of contacting the government, you can go thru a commercial bonding company or agency that offers such services. You can also get a bond on your own by contacting an insurer who specializes in surety bonds.

The cost of obtaining a bond will vary depending on the type of bond you are looking for, but typically they are inexpensive. It typically starts at KES 30,000 or less, while performance bonds can start at KES 500,000 or more. The higher the amount needed for the bond, the more expensive it becomes.

Bid bond example Form (PDF)

If you were bidding on a KES 1,000,000 project and wanted to ensure that you would get paid for your work, you would need to pay KES 600,000 with your bid and show proof of your financial ability to do the work. Your bid is worth more than its face value since you enter into a surety relationship with the public body and you are guaranteeing payment if you win the project.

Conclusion

A bid bond is a performance or payment guarantee that secures the performance of a contract for public works. It is a guarantee, which is required by the public body, that the contractor will perform as agreed. The bond must be equal to 60% of the contract price and must be deposited with the local government. 

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