WHAT DOES A BID BOND LOOK LIKE?

COUNT ON STOKES SURETY BONDS

contractor holding his bid documents for tender date

Brief

The construction industry and real estate development fields are currently booming. Not only are more and more people buying homes today, but developers are building more and more subdivisions and commercial buildings.

It goes without saying that the industry is on fire right now. This is why more people are looking to get into the field. The only problem is, the industry can be more than confusing.

Not only do contractors need to ensure that projects get done per code and required standards, but they have to know and understand how to pull bonds, permits, and meet contracts.

That being said, it all starts with a bid. Before a contractor or construction company can get a job, they must put in a bid.

Unfortunately, there is more to the entire process than just placing a bid. While the process might sound easy, it can be extremely complicated. This is especially true, given the fact that some parties require bid bonds.

TOO LONG; DIDN’T READ (TL;DR)

A bid bond is a written guarantee between three parties: surety, principal (contractor), and the obligee (the project owner). The principal is required to obtain the bid bond from the surety before placing a bid on the project. Essentially, the bond acts as a guarantee that the principal can complete the project at the stated price as they have the financial resources to do so. This protects the obligee in the case that the principal decides to increase the price and not follow the terms outlined.

KNOW WHAT A BID BOND IS

Whether you are a construction company or a customer getting construction work done today, it is more important than ever to understand how to protect yourself. With the popularity of the construction field booming and buildings going up everywhere, more and more people are getting into the construction field. While this might seem like a good thing, there are a lot of scammers getting in on the industry. People that are only looking to make a quick buck, get jobs done as fast as possible, and make as much as possible for doing as little work as possible.

Simply put, there are a lot of scams in the industry today. One of those scams is, putting in low bids and then jacking the price way up. Construction companies will bid low so that you hire them and then when they have you on the hook, they’ll jack up the price beyond belief. Luckily, this is where the bid bond comes in handy. It is a binding contract that ensures the construction company will complete a project as they promised. This means that if a contractor bids on an industrial job for $1 million, he or she must complete that job for $1 million.

Even if the work goes over, the contractor or construction company will have to recoup the extra charges. This is why it is important for contractors to properly calculate all the intended costs of a project when dealing with bid bonds. It goes back to that old familiar saying that you’ve likely heard over and over again, “Measure twice, cut once!” This statement couldn’t be truer when it comes to bid bonds. While bid bonds might seem like they only help the customer or obligee, they actually can extend protection and motivation to the contractor or principal as well.

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

THE BASICS OF A BID BOND

While a bid bond might seem simplistic and straightforward, they are anything but. This is especially true in today’s fast-paced construction world. Things can be harder than ever to keep up with when you are dealing with multiple bids, bonds, and contracts. Regardless, organization is key! Keep everything organized in a neat place, and you shouldn’t have a problem keeping track of everything. However, before you can start keeping track, you need to know and understand the basics of a bid bond.

When dealing with bid bonds , there are usually three parties involved. This would be the obligee, the principal, and the surety. The surety is the company that issues the bond. This could be a bonding company like Stokes Surety Bonds, or it could be a financial institution as well as an insurance provider. The obligee, while they might sound like the contractor, is actually the customer. This is the entity or the part involved in the equation that requests or requires the bid bond. This type of bond does offer them the most protection in the equation.

The last party involved in the principal and this would obviously be the contractor or the individual performing the work. This will be the entity in the equation that has to apply and pay for the bond. While the surety company will cover the finance charges in the event of insolvency, it will be the principal that eventually suffers. They will not only suffer financially, but they can suffer in other ways as well. It can hurt their reputation!

KNOWING HOW BID BONDS WORK

Bid bonds are specifically designed to prevent contractors or construction companies from submitting frivolous or inappropriate low bids. As was mentioned before, this is a dirty tactic that a lot of construction companies are using today. They will place low bids, win the job, and then jack the price upon the customer. This is why bid bonds were instituted. During a construction bidding process, various contractors or principals will place various bids or estimates as to what it will financially take for them to start and finish a project.

They will then submit this price to the obligee or customers, who will then view it. Most of the time, the obligee ends up going with the cheaper party. While this might seem like the best way to save money, it is not always the wisest decision. You have to remember that old saying, “You get what you pay for.” When all said and done, the contractor that wins the bid will be given the contract. A bid bond can be put in place during this process to ensure that the contractor follows through with the price and standards that they promised.

When the contractor fails to meet the agreed-upon requirements of the contract, the difference of the amount will be paid out to the obligee or customer. Although it is the surety company that pays out the difference in the bid, it will be the principal that end up paying because the surety will then turn to the principal or construction company for compensation. There are even times when the surety company has sued various contractors to recover the loss.

Of course, this will all likely depend on the contractor, the bonding company, and the overall terms of the bid bond. Regardless, it is pertinent for all parties to understand exactly what they are getting into when it comes to bid bonds.

To learn more about this in detail, please take a look at how does a bid bond work?

HOW THE COSTS OF BID BONDS ARE CALCULATED

Whether you are a contractor, construction company, or homeowner, you can clearly see just how important these bonds are. They not only extend the peace of mind, but they offer financial compensation and protection to the obligee. They do protect the principal as well, while they might not seem like it. That aside, these bonds can be extremely confusing. This is especially true when it comes to the price. This is because each and every job is unique and there are a variety of factors that can determine the overall costs of bid bonds.




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



While each and every job is unique and different, there are several similar factors that surety companies turn to when pricing the premiums of these types of bonds. This could include anything from the number of previously failed bonds to the location of the project, the overall total cost of the project, the financial history of the contractor or construction company, and the size of the company. Additionally, contractors with no previous surety bonding history may not be eligible to obtain bid bonds depending on the surety company, or they may face higher premiums. 

For smaller construction or development jobs, a company or contractor might end up paying anywhere from $100 to $200 in premiums for a bond like this. For much larger projects, contractors could be looking at a percentage of the total project costs as well as an additional penal sum of the bid bond. Whatever the situation, the entire endeavor is going to be expensive. This will be even so more true if the principal doesn’t follow through with the agreed-upon terms. 

REQUIREMENTS FOR BID BONDS

Bid bonds are something that is required for all federal projects. Any time a contractor or construction company is doing work for a governmental, federal agency they will be required to apply for one of these bonds. However, due to the protection and peace of mind that they offer, they are becoming increasingly popular and more widely used in the residential sector as well. Many private firms have also started adopting these requirements just to protect themselves from the bidding risks out there today or getting scammed.

Even when these bonds are not required, they can still be a good idea. Construction companies and contractors can utilize these bonds to make their company stand out while also fostering trust with their clients. Whether the bond is required, contractors will likely be required to meet certain specific standards when applying for these types of bonds. It is hard to say what the requirements might be because each issuing surety party is different. Stokes Surety Bonds might set different standards and requirements than your smaller local issuing party.

To learn more about this in detail, please take a look at how to obtain bid bonds and the  turnaround time for bid bonds.

CONCLUSION

It doesn’t take a contract lawyer to see just how important these types of bonds are. They are not only important for the contractor, but they are even more important for the obligee or customer. You can clearly see that there is more to these bonds than meets the eye. Understanding everything one possibly can about these bonds and how they work is pertinent to getting the most out of them as well as ensuring that you don’t get taken advantage of.

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