IS A BID BOND PRICE LOWER THAN THE ASKING PRICE?
COUNT ON STOKES SURETY BONDS
As a contractor, you’ve likely dealt with bid bonds in the past. Maybe you are new to the construction and real estate fields and are just reading up on bid bonds.
Whatever the situation is, there is simply no denying that these types of bonds are extremely confusing. This is because they are not only written using terms and lingo that no one understands, but the prices vary from job to job and provider to provider.
To make things even more complicated, different providers set various requirements and limitations.
For instance, a quality provider like Stokes Surety Bonds might look in credit and financial history while another local company might base their prices more on the size of the job.
TOO LONG; DIDN’T READ (TL;DR)
Ideally, the cost of a bid bond ranges from 5% to 20%. Whereas, for smaller projects, there may be a flat fee of $100 or $200. However, there are many factors that can either increase or reduce the costs significantly.
KNOW WHO IS INVOLVED AND HOW THEY ARE INVOLVED
Usually, when dealing with various types of bonds, you’ll encounter complex and complicated lingo. It is also as if the insurance or bonding companies specifically use these terms to confuse people. While this is not entirely the case, it will be pertinent to understand these terms and lingo if you want to understand bid bonds. While each bond can be entirely different, there are usually three parties involved. This would be the surety, the principal, and the obligee.
The obligee is the customer. This would likely be the homeowner or company requesting the work. The surety is the company that issues the bond. Most of the time, this is a bonding company like Stokes Surety Bonds, however, there are times when contractors turn to insurance companies or financial institutions to get these bonds. The last party involved is the principal and this is obviously the contractor or the individual performing the work. Simple enough, right? Well, unfortunately, it gets more complicated.
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HOW MUCH WILL A BID BOND COST?
While the costs of bid bonds and the rates of bid bonds can vary from provider to provider and job to job, most are based on several factors. As was mentioned above, some providers base the costs of their bonds on the type of job while others base theirs on the cost of the job.
Regardless, there are several factors that all surety companies will base prices on. This will be the overall total cost of the project as well as the location of the project coupled with the financial history of the contractor. If you’ve had claims filed against your bond in the past, you’ll have to pay more. Also, things can be very different for contractors with no previous surety bonding history.
As for smaller projects, a contractor can expect to pay premiums of anywhere from $100 to $200. As for larger projects, the premiums are usually based on a percentage of the total overall project. Also, when dealing with larger projects, there is a penal sum factored in.
UNDERSTANDING THE PENAL SUM
Penal sums always factor in when it comes to determining the costs of bonds. Whether it be a performance bond or a bid bond, the overall total cost will depend on penal sums. To learn more about costs for different types of construction bonds, please take a look at the costs of performance bonds.
This is why it is more important than ever to understand penal sums and exactly what they mean. That being said, penal sums are the sum that will be paid in the event of a breach. If the contractor tries to rise the bid after being awarded a contract, he or she will have to pay a penal sum. A penal sum can also be the maximum compensation that a bond will provide in the event of a breach. This is similar to insurance policy limits.
While bid bonds work similarly to insurance, it should be known that the two are nothing alike. Yes, they are similar and offer similar protection, but bonds and insurance are completely different. To learn more about insurance in detail, please take a look at the insurance coverage of a bid bond.
LOWERING THE COST OF BID BONDS
Whether you are a contractor, homeowner, or federal company, you can see the importance of bid bonds. These bonds used to be only required for federal and governmental projects, but they are becoming increasingly popular in residential projects as well because they protect the obligee from getting taken advantage of on bids. That being said, bid bonds and penal sums are by no means cheap. In fact, contractors today likely won’t be able to get jobs without these in place.
This is why it is a good idea to try and lower your costs for these bonds when and where you can. One of the best ways to do so is by ensuring that you never violate or breach the terms of the contract or bond. Any contractor should take the time to thoroughly calculate every cost and every potential cost of the project. In addition to this, contractors will want to keep good financial records, as some of the costs of these bonds are based on current and previous financial standings. If you are in debt, you’ll pay more to get these bonds. You might not even be able to get one if you are so far in debt.
NEED A CONSTRUCTION SURETY BOND FOR A JOB? COUNT ON STOKES SURETY BONDS