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 Michigan Bid Bonds?
Michigan bid bonds provide financial protection for construction project owners when selecting a contractor through competitive bidding. By purchasing a bid bond, a contractor (the bid bond’s “principal”) guarantees that:
- The bid price is accurate and realistic,
- The principal can and will furnish the necessary performance and payment bonds if awarded the job, and
- The principal will accept the job and enter into a contract with the project owner (the bond’s “obligee”) if chosen as the winning bidder.
A bid bond provides a way to compensate the obligee if the principal fails to live up to this guarantee.
Who Needs Them?
In Michigan, a bid bond (or certified check or money order) is required from contractors submitting a bid for any state-funded construction project expected to exceed $50,000. Most contractors prefer not to tie up their cash and choose to provide bid security in the form of a bid bond. The bid bond must be equal to 5% of the bid price.
Many private project owners also require bid bonds as financial protection for themselves and any investors, particularly for larger construction projects.
How Do Michigan Bid Bonds Work?
A Michigan bid bond is legally binding on the obligee, the principal, and a third party—the bond’s guarantor (the surety). The principal is legally obligated to pay a valid claim filed by the obligee, but the surety guarantees the principal’s payment. That guarantee is in the form of an agreement to extend credit to the principal to pay a claim.
The surety will pay the claimant directly, which creates a debt the principal must subsequently repay. A principal who fails to repay the debt in accordance with the surety’s credit terms is likely to be sued by the surety to recover the funds.
How Much Do They Cost?
The premium for a Michigan bid bond is a small percentage of the bond amount. That percentage is the premium rate, which the surety assigns to the principal based on the risk of not being reimbursed for a claim paid on the principal’s behalf. The most reliable measure of that risk is the principal’s personal credit score.
A high credit score means the risk to the surety is low, which deserves a low premium rate. Conversely, a low credit score signals greater risk, so the premium rate will be higher.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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