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 Massachusetts Bid Bonds?
Project owners who require a Massachusetts bid bond do so because they want a guarantee from bidders on construction projects that:
- the contractor’s bid is accurate,
- the contractor is approved to purchase any necessary performance and payment bonds if awarded the job,
- the contractor will enter into the construction contract if chosen as the winning bidder.
Additionally, requiring bid bonds discourages contractors from submitting frivolous bids.
When a bidder violates the terms of a bid bond, the project owner can submit a claim and be compensated for any monetary damages.
Who Needs Them?
The state of Massachusetts requires a bid deposit in the form of a bid bond or other type of security from contractors competing for certain government-funded construction jobs. The required bid deposit amount generally is 5% of the value of the bid. It’s also becoming more and more common for private project owners to require bid bonds from contractors bidding on larger jobs.
How Do Massachusetts Bid Bonds Work?
The three parties to a Massachusetts bid bond are referred to as:
- the obligee – the project owner requiring the bond,
- the principal – the contractor purchasing the bond, and
- the surety – the bond’s guarantor.
While the principal is legally obligated to pay a valid claim, the surety has guaranteed payment. So the surety pays the claim initially–as an extension of credit to the principal. The principal must then repay the resulting debt to the surety. Not repaying the debt can cause the surety to take legal action against the principal to recover the funds.
How Much Do They Cost?
What the principal will pay for a Massachusetts bid bond is determined by multiplying the required bid bond amount by the premium rate. The premium rate is set by the surety through an underwriting assessment of the risk of the surety not being repaid by the principal. The principal’s creditworthiness, as measured by the individual’s personal credit score, is the best metric for the risk of non-payment.
A high credit score means the risk to the surety is low, so the premium rate will be low as well. A lower credit score is indicative of greater risk, which calls for 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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