IS A BID BOND REFUNDABLE?

COUNT ON STOKES SURETY BONDS

contractor holding his bid documents for tender date

Brief

Are you thinking about putting in a bid for a new upcoming project? Maybe you are thinking about getting a new porch built or a patio poured. Perhaps, you were assigned by your boss to oversee a government project.

Whatever the situation is, it is more than likely that you will end up dealing with a bid bond. This is especially true if you are overseeing a governmental project because these bonds are required. That’s right, bid bonds are required for any governmental or federal project.

Although this is the case, these types of bonds are becoming increasingly popular in the residential sector as well. This is because they not only offer financial protection, but they offer the peace of mind that one needs to rest easy at night.

TOO LONG; DIDN’T READ (TL;DR)

A bid bond is refundable when you don’t win the bid to work on the project as the obligee has proceeded with another contractor.

WHAT EXACTLY IS A BID BOND?

If you want to understand everything you possibly can about bid bonds,  you will obviously need to know the use of bid bonds in construction in the first place and the  purpose of bid bonds. In simple terms, these bonds are a three-party agreement between a principal, a surety, and an obligee. In these instances, the obligee will be the customer or the entity that is requiring the bid bond. The principal will be the construction company or contractor. This is the individual or company that has to apply and pay for the bond. The surety will obviously be the entity that issues the bond.

In some cases, this can be an insurance company. In others, it can be a specialized bonding company like Stokes Surety Bonds or even a bank. There are a lot of financial institutions that are starting to offer this type of protection. If you are following what is known as the Miller Act, you will have to put in a bid bond anytime you submit a bid for a project. The main purpose of this bond is to ensure that the contractor will take on a job with the price that they initially promised during the bid. They can’t raise or lower the cost, although lowering it wouldn’t make any sense.

A bid bond also ensures that the contractor will apply for a performance bond once he or she wins the contract. That’s right, just because you get a bid bond and win a contract, it doesn’t necessarily mean that you are done with bonds. This is why it is imperative to understand everything you possibly can about them and how they work. While they all work in different ways, it will always be the same three parties that are involved in the equation.

That being said, a performance bond is another type of bond that ensures a contractor follows specific standards on a project. To learn more about this in detail, please take a look at how does a performance bond work?

HOW DOES A BID BOND WORK?

Now that you know what a bid bond is, you likely have a general idea of how does a bid bond work? That doesn’t necessarily mean you understand everything you need to about them, but you likely have a general idea. As with every surety agreement, there is a total bond amount that a contractor or principal will be liable for when they breach or violate the agreement. In this specific situation, a violation could be that you refused to take on a specific project, or you raised the overall price of the bid once you won the contract.

A violation or a breach is something that is taken extremely seriously. When this happens, it will be both the surety and principal that are jointly responsible for the financial compensation to the obligee. Just, for instance, say that you win a project bid of $1 million and raise the price to $2 million. It will be you and the issuing surety company that is equally responsible for that other extra $1 million. More often than not, there is also a penal sum involved. This is an extra cost that can be anywhere between 10 percent to 20 percent of the total bid amount.

HOW TO GET A BID BOND?

In order for a contractor to obtain a bid bond, they will have to apply through a surety company, a bond company, a financial institution, or an insurance company, and the turnaround time for bid bonds is extremely low. Bonding companies like Stokes Surety Bonds simply don’t work directly with the public, but they are more than open to working with contractors and construction companies. Whatever the situation is, it is imperative to work with a quality issuing company. This is because they will completely understand all the unique risks and terms that one faces when putting one of these bonds in place.

This is even so more true when working on federal projects. You need to make sure that you are working with a quality surety company with an A-rating. An A-rating means that the bonding or surety company has an A score given by the AM Best Company. This is one of the top-reputed rating agencies in the world. An A-rating would mean that the company is reliable as well as dependable and will be there when needed.

When submitting applications, the bonding company will do a very thorough evaluation of your credit score and history to determine whether are deemed a reliable company. It is important to note that things can be very different for contractors with no previous surety bonding history.

This will likely also factor into the overall total cost of your  bonding premiums. The lower your financial score, the more you will likely have to pay. Unfortunately, there are situations when previous companies have been denied bonds before their financial history was so poor. If you have a lot of claims filed against your company as well, you can and will be denied.



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



   Cost of Bid Bonds

   Rates of Bid Bonds

   Asking Price of Bid Bonds

AVOIDING BID BOND CLAIMS

One can clearly see just how important it is to not have claims filed against their bonds and insurance. This is not only true with bid bonds, but it can pertain to any type of bond. For instance, a claim can be filed against performance bonds, surety bonds, or any bond in general. You’ll want to make sure that you avoid claims at all costs. While this might sound straightforward, it can be more complicated than one imagines. The very best way to avoid claims against bid bonds is by taking the time to make sure you thoroughly evaluate and calculate all the costs for the project. 

Whether it be materials, overtime, or manpower, you need to make sure that everything is properly evaluated for the project in question. Don’t forget to fudge the numbers just a bit because there might be times when you have to go back over something or face unexpected charges. It seems like unexpected costs and expenses always rise on construction sites, regardless of how well one plans.

GETTING REFUNDED FOR BID BONDS

Now, there are times when you might apply for and acquire a bid bond, but not win the project. This could be because you were outbid or because the obligee just decided to go with another contractor. Whatever the situation is, you’ll be more than happy to know that your money is refunded in these situations. That’s right, you’ll be granted a refund for your bid bond when you don’t win the bid.

CONCLUSION

As a contractor, it might not seem like it, but bid bonds are protective to you as well. They can motivate you to take the time to properly calculate everything that needs to the calculated for a project. The benefits for the obligee are pretty apparent.

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