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 Texas Bid Bonds?
Texas bid bonds are intended to protect state or municipal contracting authorities or private project owners against financial losses if a contractor:
- Submits an inaccurate bid and later claims the work can’t be done for that price,
- Is unable to purchase the necessary performance and payment bonds if awarded the contract, or
- Does not accept the job and enter into a contract if chosen as the winning bidder.
A Texas bid bond is a contractor’s guarantee that none of these situations will arise. If the contractor (known as the bond’s “principal”) does not live up to that guarantee, it can cause the project owner (the bond’s “obligee”) financial harm. The obligee can then file a claim against the bond and be compensated for monetary damages.
Requiring bid bonds also helps prevent contractors from submitting frivolous bids.
Who Needs Them?
Texas contracting authorities can require a bid guarantee for contracts valued in excess of $100,000. The bid guarantee can be in the form of a certified check, but most contractors choose to purchase a surety bond, which must be in an amount equal to 5% of the bid price. Private project owners may also impose a bid bond requirement.
How Do Texas Bid Bonds Work?
The third party to a Texas bid bond, in addition to the obligee and the principal, is the “surety,” the bond’s guarantor. The legal obligation to pay valid bond claims is exclusively the contractor’s. However, the surety has agreed to extend credit to the principal if that’s what it takes to pay a valid claim. The surety taps into that credit line to pay a claim initially, which creates a debt that the principal must then repay. If the debt is not repaid, the surety can take legal action to recover the funds from the principal.
How Much Do They Cost?
The premium cost of a Texas bid bond is the product of multiplying the required bond amount by the premium rate, which is assigned by the surety through underwriting. The premium rate will reflect the perceived risk of the surety not being repaid for claims paid on the principal’s behalf. That risk is measured by the principal’s personal credit score.
A high credit score means a low risk to the surety, which results in a low premium rate. A low credit score indicates a higher risk level, which requires 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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