Bid Bonds, Performance Bonds, Payment Bonds. They each have a different purpose and include certain risks. So which one is the greatest danger for the surety and agent, and why?
Performance Bonds are an obvious choice. We may think of Performance Bonds as the main reason a project is bonded – they protect against contractor default and assure completion of the work.
While this is certainly significant, it is not the Greatest Danger. Performance claims are usually preceded by events that give the surety a chance to respond. A “Cure Notice” may be sent by the obligee alerting the contractor and surety that a deficiency exists and if left uncorrected, a bond claim may result. Another event preceding claim is the declaration of default by the obligee. (The contractor is thrown off the project.) This would be a major event and all interested parties would receive notification.
If the surety cannot help remediate the performance problem and a claim results, the unpaid portion of the contract amount is a financial resource that always helps the surety in addition to potential recovery via the General Indemnity Agreement.
The Payment Bond is actually the most common source of bond claims. There may be disputes about the performance of subcontract work or materials supplied. Unjustified claims will be declined and for valid claims, the contract funds and Indemnity Agreement are resources for the surety. Even though they have claim frequency, Payment Bonds are not the Greatest Danger.
So that leaves the lowly Bid Bond. Some think of them as just incidental, like ordering a Builders Risk policy. Their dollar amounts are smaller than Performance Bonds. They are issued for free or for a small service charge. Once produced, they are quickly forgotten like they were hardly valuable in the first place. Nothing glamorous here. But what are the dangers with Bid Bonds?
The first unique thing is that you get once chance to issue them correctly. On competitively bid work, such as government projects, the bid bond accompanies contractor’s proposal. The bids are stamped for date and time when submitted, and if your proposal is late, it is rejected! The bids are opened and examined by the contract administrators. The bid bond and accompanying proposal can be rejected for technical errors such as the wrong project number, missing signatures, or any other details. On the other hand, mistakes on Performance Bonds can normally be corrected without penalty. The contractor already has the project, so there is no harm in allowing the bond to be adjusted. With bid bonds in a competitive situation, there is no chance to make a correction – the other bidders will not allow it! A bid protest or lawsuit would likely result.
In addition to accuracy and timely delivery, bid bond documents can result in a rejection if mishandled. For example, the failure to use a mandatory bid bond form or the absence of a Surety Consent could result in proposal rejection.
Proposal Rejection – let’s talk about that. The surety or agent makes one of the errors we described, the bid bond is deemed insufficient, and the contractor’s proposal is rejected. On public work the bid results are normally published, so the client will know if their rejected proposal would have been the winning number, and they would have acquired the contract.
In addition to the embarrassment of making an error, the loss of revenues, and maybe losing a customer, here’s the worst part: There have been cases where the contractor sued the surety for lost profits – the profits they expected to acquire from the project. This is a constant threat on Bid Bonds, and the indemnity agreement doesn’t help if the error was solely on the part of the surety or agent. A lawsuit like this could be for millions of dollars.
Bid Bonds are the winners! They are the Greatest Risk for sureties and the agents who execute them. We have one chance to get them right. They must be perfect every time.
A special note from the author: Steve Golia
I am an Independent Broker and Surety Bond Specialist. If you wish to co-broker bond business, together we will deliver the best in bonding expertise for your clients. I have a broad range of markets available and often can solve problems even when others have failed.
Call me now (856-304-7348) or email: Steven.Golia@gmail.com