Secrets of Bonding #8: Bid Bonds

“It’s only a Bid Bond.  If you can issue it now, we’ll complete the underwriting later.”

Unfortunately it doesn’t work that way.  In this article we’ll talk about the purpose of Bid Bonds and how to deal with them effectively.

Every surety bond contains a promise that something will happen.  For example, a Performance Bond guarantees the correct performance of a written contract.

A Bid Bond is often required to guarantee the bidder’s sincerity on projects funded with tax dollars (public work such as federal, state, and municipal projects.)

The promise contained in the bid bond is that one of two things will happen.

  1. If the bidder receives a contract award, they will sign the contract, produce the required Performance and Payment (P&P) Bond and commence with the work.  Or in the alternative…
  2. Pay the difference between their bid and next higher proposal.

For the benefit of the taxpayers, this assures that if the low bidder does not proceed, the work will still be performed for their price – which was the lowest price bid.

Bid Bonds are part of construction bonding or what we call “Contract Surety,” but they are really Financial Guarantee Bonds.  Sureties are always careful when issuing these.  So you can throw away the “It’s only a bid bond” comment.  Sureties view Bid Bonds as part of the acquisition process for Performance Bonds.  If the underwriting is not resolved for the P&P bond, the surety has no motivation to issue a financial guarantee/bid bond.

Other points worth knowing:

  • When ordering a bid bond, the underwriter does not want to know the actual bid price so the confidentiality is protected.  Just round up the number.
  • Award of the contract based on a bid bond indicates the obligees approval of the surety – which presumably is then transferred to the upcoming P&P bond.
  • Bids that are more than 10% below the next bidder will require a written explanation (prior to the P&P bond) to assure there are no calculation errors and an adequate profit margin.
  • Bid bonds are sometimes capped, meaning the bond will not support a bid higher than the bid estimate the underwriter approved. In such cases, it is important to use an ample figure on the Bid Bond Request form.  If there is a last minute bid increase, such as a subcontractor or supplier coming in higher than expected, the bidder will not be able to bid a dollar more than the pre-approved figure.  Remember, there is no downside to bidding less than indicated.
  • Postponements – when bid dates are rescheduled, the obligee may permit the original bids bonds to be used even though the stated bid date will now be incorrect.  Check with the obligee to see if you must re-issue the bid bond to show the new date.
  • When a bid is outstanding (undecided), the contract amount is considered “in use” in regard to their available capacity.  Therefore, “not low” bids should be reported promptly to the surety.
  • Bid Bonds are considered terminated upon issuance of the P&P bond, or after 90 days.
  • The bid security of the low three bidders is usually held until the contract is signed and bonded by the low bidder (see our following comment about using a check!)

One last word of caution: A check may be accepted as an alternative to a bid bond.  However, it is subject to forfeiture if the bidder receives an award but cannot produce the P&P bond.  Always use a Bid Bond if possible!

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