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 construction bond needs.
What Are They?
The process of advertising a construction contract, creating and distributing an RFP, evaluating proposals, selecting the winning bidder, drafting a contract, and so on can be time-consuming and labor-intensive. A Colorado bid bond is a contractor’s guarantee to accept a job if chosen as the winning bidder. It also guarantees the contractor will be able to purchase a performance bond and payment bond if required to do so.
So what happens if the winning bidder backs out at the last minute? Perhaps the contractor bid on multiple projects at the same time but lacked the capacity to handle all of them. Or maybe the contractor bid too low and now realizes it would be impossible to make a profit on the job. Having to repeat the process to find a new contractor would cause the project owner (the bond’s “obligee”) a financial loss and delay the project. A Colorado bid bond provides a way for the obligee to recover monetary damages from the bidder (the bond’s “principal”).
Who Needs Them?
Under Colorado’s “Little Miller Act,” state-funded construction projects valued in excess of $100,000 require bid bonds from all bidders. Increasingly, private project owners also require bid bonds. The bid bond must typically be 5% to 10% of the bid amount.
How Do They Work?
A Colorado bid bond is a legally binding agreement that brings together the obligee, the principal, and a third party—the bond’s guarantor (the “surety”). If the principal has turned down a job, the obligee can file a claim against the bid bond to recover the resulting costs of rescheduling the project and selecting a new contractor. The principal is legally obligated to pay all claims the surety deems valid.
As the bond’s guarantor, the surety has agreed to establish a line of credit that can be used by the principal to pay claims, if necessary. Unless the principal can pay a claim in full immediately, the surety will pay it, tapping into the principal’s line of credit. But that’s a loan to the principal, not a gift. The principal must repay the resulting debt according to the terms established by the surety. Not repaying that debt is not optional, as the surety will take legal action if that’s what it takes to recover the debt.
What Do They Cost?
What a principal will pay for a Colorado bid bond depends on the required bid bond amount and the premium rate assigned by the surety through underwriting. The biggest concern is the possibility the surety won’t be repaid for claims paid on behalf of the principal. That risk is measured largely on the basis of the principal’s personal credit score.
A high credit score strongly indicates that the risk to the surety is low, which makes a low-interest rate appropriate. Conversely, a low credit score signals higher risk, which results in a higher premium rate.
A well-qualified principal typically will be assigned a premium rate in the range of 0.5 to 3 percent.
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