Florida Bid Bonds
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What Are They?
Florida bid bonds are a type of construction surety bond guaranteeing a project owner that the winning bidder will accept the contract at the price quoted. This protects the project owner against the expense of having to go through the process of finding another contractor if the winning bidder bows out. That sometimes happens when contractors bid on multiple projects simultaneously without having enough capacity to accept them all. It also happens when contractors realize too late that their bid was too low to make a profit. Having to re-bid a project can be an expensive undertaking and can have serious scheduling implications.
In addition to guaranteeing acceptance of the contract, a bid bond also guarantees that the bidder will be able to obtain a performance bond and a payment bond if awarded the contract. (Both performance and payment bonds are required by state law for public works projects in Florida as well as by many private owners of larger projects.)
Who Needs Them?
Contractors bidding on projects funded by a Florida government department, agency, or other state entity are required to provide a bid bond in an amount equal to 5-10% of the total bid amount. The contractor only pays for a bid bond if chosen as the winning bidder.
Increasingly, private project owners in the state also are requiring Florida bid bonds.
How Do They Work?
If the winning bidder turns down a job, a new winner must be selected. This may involve readvertising the project, issuing a new RFP, evaluating a new batch of proposals, and vetting another batch of bidders. If it extends the project schedule, other complications can arise, with financial consequences for the project owner, known as the bond’s “obligee.” The obligee can file a claim against the contractor’s bid bond and be compensated for monetary damages. The contractor is known as the bond’s “principal.”
In addition to the obligee and the principal, there is a third party to a Florida bid bond—the bond’s guarantor, referred to as the “surety.” In guaranteeing the bond, the surety has agreed to extend credit to the principal for the purpose of paying claims, should that become necessary.
The surety investigates each claim received to make sure that it’s legitimate. If it is, the principal is legally obligated to pay it. The usual practice is for the surety to pay the claimant directly, drawing against a line of credit established for the principal at the time the bid bond was purchased. This loan must be repaid according to the terms of the surety bond agreement. If it is not, the surety can sue the principal to recover the debt.
What Do They Cost?
The premium for a Florida bid bond is a small percentage of the bond amount required by the obligee. That percentage is the premium rate, which the surety assigns on a case-by-case basis through underwriting. It’s based largely on the applicant’s creditworthiness as indicated by the principal’s personal credit score.
A high credit score is the result of a strong record of being financially responsible, which suggests that the risk of the surety not being repaid for claims paid on the principal’s behalf is low. When the risk to the surety is low, a low-interest rate is appropriate. On the other hand, a low credit score is a red flag for higher risk, which warrants a higher premium rate.
A well-qualified principal typically will be assigned a premium rate in the range of one to three percent.
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