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 California Bid Bonds?
When a California bid bond is required, the purpose is to protect project owners against financial losses caused by the winning bidder for a construction project by submitting an inaccurate bid or not accepting the contract. A bid bond also guarantees that the contractor is able to provide any required performance and payment bonds if awarded the contract.
A surprising number of contractors bid on multiple jobs, knowing they don’t have the capacity to carry out multiple projects at the same time. Others may discover their bid was too low to make a profit. It’s for reasons like these that winning bidders sometimes turn down a project without ever entering into a contract with the project owner.
In addition to providing a way for project owners to recoup monetary damages in such cases, being required to furnish a bid bond helps discourage frivolous bidding.
Who Needs Them?
Unlike many states, California does not mandate bid bonds from contractors vying for a public works project through competitive bidding. However, many project owners, public or private, do require bid bonds. When a bid bond is required, the amount of the bond typically is 5% to 10% of the contractor’s full bid price.
How Do California Bid Bonds Work?
A California bid bond is a legally binding contract among three parties known in surety bond lingo as the obligee, the principal, and the surety:
- The project owner requiring the bond is the “obligee,”
- The contractor purchasing the bond is the “principal,” and
- The bond’s guarantor is the “surety.”
When the principal violates the terms of a bid bond, causing financial harm to the obligee, the obligee can file a claim for monetary damages. The principal is legally obligated to pay the claim if the surety finds it to be valid. But because the surety has guaranteed the payment of claims, the surety will pay the claimant directly, as an extension of credit to the principal. A principal who does not repay that debt will most likely be sued by the surety to recover the funds.
How Much Do They Cost?
The premium for a California bid bond rarely costs more than a few hundred dollars. The premium is the product of multiplying the required bond amount by the premium rate assigned by the surety through an underwriting risk assessment based largely on the principal’s personal creditworthiness.
A high credit score is a sign of low risk, which results in a low premium rate. Lesser credit indicates greater risk and warrants a higher premium rate.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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