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Bid Bonds ensure that the bidder (applicant) on a contract will enter into the agreement and endow the required payment and performance if awarded the contract. Bid bond companies uses these agreements as financial security for contract bid proposals, particularly for large projects such as commercial developments.

The main goal of a bid bond is to make sure that the low-bidding contractor will stand behind the amount quoted in his bid. This keeps the contractor from increasing the bid on the project after entering into a contract with the developer.

A bid bond involves three parties:

Obligee: the corporate or government entity who seeks the financial protection of a bond to make sure that their project is completed by the contractor or construction company for the proposed low bid.

Principal: the contractor who purchases the bond to guarantee financial integrity.

Surety: the agency who issues the bond to the principal.

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Bid bonds impose that the contractor will safeguard other important performance criteria required throughout the project. If by any chance the contractor is not able to complete the work and breaks the contract, as per the bond, the developer (or Obligee) has authority to collect damages in the amount of how much more he has to pay to contract the next-lowest bidder for the project. If the contractor cannot cover the cost, the surety will be held accountable for paying reparation up to the bond’s full face value.

It is a non-verbal guarantee from a third party guarantor- which is usually a surety bond insurance company – to a principal (client or customer) by a contractor (bidder). Before issuing the bid bond, the surety will require the contractor to be in good standing: including financial history/stability; experience; supplier references; and banking relationships.

Bid bonds are most commonly used as a risk management tools required at the beginning stage of a construction project.

Bid bonds typically require a contractor to provide between 5% and 10% of the bid upfront as a penal sum. Contractors prefer these bid bonds because they are a less expensive option and they don’t tie up cash or bank credit lines during a bidding option. However, federally-funded projects usually require the penal sum to be 20% of the bid. Moreover, the surety company will seek damages from the contractor for any losses. Contractors pay surety agencies a premium to secure a bid bond. Bid bond costs vary greatly due to a number of factors, such as the bid amount, contract terms, and the jurisdiction in which the contract is executed. Typically bid bond premiums are between 1% and 5% of the penal sum.

If you are a contractor and new to surety bonds and need some guidance on surety bid bonds, Surety Bond Professionals offers a quick and easy process for obtaining bid bonds, with the least amount of hassle.

Get your free quote today by using our Bid bond application form. Contact Surety Bond Professionals to get an instant bid bond quote now.

If you have any questions, please contact us for help.