Surety Bond Professionals is a family owned and operated bonding agency with over 30 years of experience. With access to a broad range of surety markets, our expert agents are ready to assist with all of your bid bond needs.
What Are Alaska Bid Bonds?
Alaska bid bonds are designed to protect project owners against the negative financial impact of the winning bidder on a construction job not accepting the contract. This can happen when a contractor realizes that their bid was too low to make a profit on the job. It’s also common among contractors who bid on more than one job at a time without having the capacity to accept multiple contracts.
In furnishing a bid bond, contractors guarantee that their bid is accurate. A bid bond also guarantees that the contractor is qualified and able to purchase any payment or performance bonds required to be awarded the contract.
If the winning bidder violates the terms of a bid bond, the project owner can file a claim seeking compensation for the costs and delays incurred as a result of having to select another contractor.
Who Needs Them?
According to the Alaska Administrative Code § 109.130, “Bid bonds or bid security in the amount of at least five percent of the bid price(1) must be submitted with all invitations to bid for construction projects estimated to cost over $100,000.”
Increasingly, private project owners as well as public awarding authorities are requiring bid bonds from potential contractors.
How Do Alaska Bid Bonds Work?
Every Alaska bid bond is a legally binding contract involving three parties:
- The obligee – the awarding authority (project owner) requiring the bond,
- The principal – the contractor purchasing the bond, and
- The surety – the bond’s guarantor.
Although the principal is legally obligated to pay all claims the surety deems valid, the surety guarantees their payment. To honor that guarantee, the surety will pay the claimant directly, by drawing against a line of credit established for the principal when the bond was purchased. The principal must repay the resulting debt to the surety or face legal action to recover the funds.
How Much Do They Cost?
Alaska Bid bonds are sold for an annual premium calculated by multiplying the required bond amount by the premium rate assigned by the surety through underwriting. The underwriting goal is to determine the risk of the surety not being repaid for claims paid on the principal’s behalf. The metric for measuring that risk is the principal’s personal credit score.
A high credit score means the risk to the surety is low, so the premium rate will also be low. A low credit score, on the other hand, means that the risk level is higher risk level, so the premium rate will be higher as well to offset the greater risk.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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