WHAT ARE BID BONDS AND PERFORMANCE BONDS?

COUNT ON STOKES SURETY BONDS

contractor holding his bid documents for tender date

Brief

There are two very important bonds utilized by construction contractors and companies. The bid bond and performance play major roles in protecting American consumers and contractors during construction projects.

The bonds share some similarities and differences, which every construction contractor and consumers should know like the back of their hands. These similarities and differences are provided more in-depth in the article below.

TOO LONG; DIDN’T READ (TL;DR)

Bid bonds provide the obligee with a guarantee that the job will be completed at the stated prices. In order to bid for a project, it is a must to obtain a bid bond first. If there are no bid bonds, the obligee has no guarantee that the contractor has the financial resources required to complete the project.

Whereas, performance bonds act as a financial guarantee that you will complete the project based on the terms outline and within the deadline. If you fail to uphold your end of the agreement, the obligee has a right to file a claim against your performance bond. As such, it is best to avoid any situations where a claim may arise.

BID BOND FOR CONSTRUCTION CONTRACTORS

As mentioned previously, bid bonds help protect Texas contractors when bidding on construction projects. There is no doubt that bidding processes are risky. In fact, many construction contractors will agree that it is one of the riskiest steps of an entire project. 

Bid bonds were created specifically for this purpose. However, they have another purpose in mind as well. This purpose involves the project owner. Bidding helps project owners get the lowest and fairest prices on construction projects. 

The bidding process can go on for a few days, weeks, or months. It really depends on the project owner as to how long the contractors have to bid on their project. In most cases, the project owner will drag the process out for a month or so just to give local and out-of-town contractors plenty of time to bid. The more bids, the better the odds of getting a better price.

To learn more about this in detail, please take a look at the use of  bid bonds in construction.

BID BOND – WHAT DOES IT DO?

When you break a bid bond down, you get to see how does a bid bond work? When all the bids are in, the project owner will thoroughly scrutinize each one of them to determine which one will meet their project needs and preferences the most. It is important to remember that just because a contractor offers the lowest bid does not necessarily mean he/she will win the project. 

Each bid must be accompanied by a surety. In this case, the surety is a bid bond. The bid bond is utilized to back up the contractor’s bid. Each bidding contractor must provide the project owner with an amount that will cover the entire project.

BID BOND – WHAT HAPPENS WHEN THE CONTRACT FALLS THROUGH?

Unfortunately, not every contract is fulfilled to a tee. In fact, hundreds if not thousands of contracts are breached each year for one reason or another. When this happens, the project owner files a claim against the contractor’s bid bond. In turn, the surety company initiates an investigation into the claim. If the claim is determined to be legit, the surety company will award the value of the contractor’s bid bond to the project owner. 

What is the value of a contractor’s bid bond? To determine the value, the surety company will subtract the amount of the winning bid price from the next bid in line at the bottom of the bid list.

This amount may only be a few hundred or a thousand dollars, depending on the difference between the two lowest bids.

PERFORMANCE BOND – WHAT IS IT?

A performance bond is very similar to a bid bond. Both bonds are utilized in construction projects, protecting the project owner’s investment. The construction company or contractor is responsible for obtaining the performance bond. Not every performance bond application will be accepted. There are numerous factors that can result in the denial of a performance bond application. 

These factors include, but are not limited to an incomplete application, too many open construction projects, low credit score, history of breach of contracts, overextension, and lack of financial presentation. If the applicant, in this case, the construction contractor does not qualify for a performance bond, the surety company will deny the application.

As far as a performance bond goes, the applicant must meet or exceed all the qualifications. However, this is across the board on all surety bonds. Surety companies try to minimize their risks as much as possible. Denying unqualified construction contractors is just one example.

PERFORMANCE BOND – HOW DOES IT WORK?

Performance bonds are specifically designed to protect investors when hiring construction contractors. It is pertinent for investors and clients to protects themselves and using performance bonds is one way to do that. With performance bonds, clients can rest assured knowing they’re going to be protected from potential problems. If the contractor is unable to get the job completed on time or satisfactory, the client will have a way to seek compensation.

They can file a claim against the bond and get money. This ensures that they’re able to find another contractor to finish the project. Furthermore, this encourages the contractor to work diligently and swiftly. Performance bonds help ensure that the contractor is going to work hard to take care of business.

WHY OBTAIN PERFORMANCE BONDS?

Ultimately, performance bonds offer various benefits. With a performance bond, you can give your customers the reassurance that you’re going to work hard on their behalf. Texas construction companies need to work diligently to ensure that their clients are happy. If they don’t, there is a risk that they’re going to have a claim filed against their performance bond and that could lead to major issues.

Obtaining a performance bond is good for you and your client. First and foremost, it gives the client confidence that you’re going to do your best. Furthermore, it decreases the likelihood that you’ll fail to meet your obligations and your client will appreciate this. Finally, you should know that bond requirements remove poor companies from the picture.

If a company isn’t willing to get a performance bond, they’re going to lose out on the job. You should get a bid bond and a performance bond. This combination increases the chance that you’re going to get the contract.

THE COSTS OF PERFORMANCE BONDS

Performance bonds are essential for your business. Nevertheless, you’ll want to be aware of the costs involved. Performance bonds can be expensive, but they’ll pay dividends in the long run. After all, you cannot obtain the contract until you’ve received the bond. So, how much can you expect to pay? Bid bonds tend to be cheaper than performance bonds.

With bid bonds, you may be able to obtain a flat fee bond. As for the performance bond, you won’t. Instead, the price is going to vary depending on the circumstances. The cost will be roughly 1% of the value of the contract. If you’re dealing with a larger contract, the costs may rise. It could be 1.5% or 2% of the contract’s value.

It is pertinent to find out how much you’re going to pay. The best way to do that is by speaking with a professional. Contact Stokes Surety Bonds, so you can find one of the best surety agents in Texas.




To learn more about the costs for both of these bonds in detail, please take a look at the following links:



  Costs of Bid Bonds

  Rates of Bid Bonds

  Asking Price of Bid Bonds

  Costs of Performance Bonds

OBTAINING BOTH

As a Texas construction company operator, it is pertinent to learn more about construction bonds. Performance and bid bonds are two of the most common construction surety bonds you’ll find yourself using regularly. It is vital to learn how these bonds will impact your business and its operational costs. Once you’ve done that, you’ll be ready to obtain the necessary bonds for any project. This will give you the chance to win your bid and move on to the next stage.

If you need assistance obtaining construction bonds in Texas, you should contact Stokes Surety Bonds. They’re eager to help and point you in the right direction.




To learn more about this in detail, please take a look at the following links:



•  Obtaining Bid Bonds

•  Turnaround Time for Bid Bonds

•  Obtaining Performance Bonds

NEED A CONSTRUCTION SURETY BOND FOR A JOB? COUNT ON STOKES SURETY BONDS