Why Get Contractors Liability for Bid Bonds?
Bid bonds are important parts of contracting and if you are new to the game you might not be as fluent in the term as you need to be. Let’s take a look at some of the basics of bid bonds.
What is a Bid Bond?
In short a bid bond shows proof of guarantee to the owner of a project that you can comply with the bid contract and that you will be able to accomplish the job as it is laid out in the contract. It assures the project owner that you have the capability to take on and carry out the project if you are selected for the project during the bidding process. In normal circumstances project owners have no idea if a contractor is able to financially handle a project, having a bid bond takes that guess work out. Bid bonds will make a project owner feel more comfortable and they are more likely to go with a contractor who has one, knowing if the project fails they can collect compensation.
What will happen if the obligation is not met?
If the obligations of the big bond are not met the contractor and surety are liable jointly for the bond. There are penalties applied to failure to comply with bond obligations as well. Also when the project owner has to go and find a new contractor to finish the work if there are associated costs the owner of the bid bond must pay as well. Standard for that cost is the difference in the bid that was held and the new bid.
How they work
When a bid bond requirement is made for a project it keeps contractors from submitting frivolous bids and helps project managers to feel secure in the contractor choice. Bond issuing companies do a full and comprehensive credit and financial review before they will provide a bond for any company. During the bidding process contractors submit what they think it will cost to get the job done. What this means is that usual standard process is that the bonding company will pay the owner the difference between the lowest and next lowest bids.
Requirements of the bid bond
Under the Miller Act all bidders are required to submit bid bonds on a federal project. There are many private firms who have decided to follow suit with this act to protect themselves during the bidding process. If you want to be a competive contractor it is almost certain that you will need to have bid bonds and know the process, certain states even require them for all projects.
The ways you can meet the federal standards for bid bonds are as follows:
Bonds issued by an individual surety that pledges certain defined types of assets.
- Marketable assets.
- Letters of credit from a federally insured financial institution.
- Bonds issued by an approved corporate surety.The Department of the Treasury maintains a list of corporate sureties approved to issue bonds for federal projects, Treasury Department Circular 570.
These are the basics of bid bonds but there is a great deal more to know when setting them up. If you have any questions you can always contact your local insurer to find out more about what you can do to set them up. It is good idea for any contractor to really look into protecting themselves and their clients by having bid bonds. The only way to grow your business is to make sure that your clients feel as safe as possible and then do the work you have promised you would do.