Bid Bonds

Contractors, Builders, Re-modelers and Construction Industry professionals are very familiar with Bid Bonds as Bid Bonds are crucial function of procurring work for a Construction Firm.

From www.BusinessDictionary.com – Bid Bonds – Written guaranty from a third party guarantor (either a bank or insurance carrier) submitted to a principal (client or customer) by a contractor (bidder) win a bid.

A Bid Bond is not providing protection for the contrator. 

Why are Bid Bonds necessary?

Bid Bonds are only necessary if the Principal, the entity requesting work, requires a Bid Bond.   Small or independent contractors dealing primarily with Homeowners may never have a reason to purchase a Bid Bond.  However, almost without exception, any job dealing with a business, municipality, or State / Federal government will require a Bid Bond.

Why does the Principal request a Bid Bond?

The Bid Bond provides two protections against contractors placing Bids on requested work and then being unable to perform. 

1. Guarantee Performance Bond – Bid Bond ensures the Principal that upon acceptance of a contractors work-bid, the Bid Bond will be replaced with a Performance Bond.  Insurance Carriers underwrite Bid Bonds and Performance Bonds at the same time ensuring consistancy between the two products.
2. Liquidated Damages – In the event work cannot be performed by the contractor who’s work-bid was accepted, the Bid Bond will pay the Principal the difference between the accepted bid and the next highest bid (this amount cannot exceed the face value of the Bid Bond).  This is also known as cashing the bond. 

What happens when a Bid Bond is cashed?

The repercussions to a contractor who has a bond cashed can be harsh.  A Bid Bond is not an insurance policy, but rather a surety (bond) product. In the event that Bid Bond is cashed the guarantor (bank or insurance carrier) sends the appropriate payment amount to the Principal to cover the bond obligation.  However, unlike an insurance policy once payment is made from guarantor to Principal, the guarantor seeks recovery of that payment from the offending contractor.

Let’s get that Clear!

Contractors – Bid Bonds provide a guarantee to the Client, they do not release your business from the bid obligation.  The contractor will be responsible to repay the Bank or Insurance Carrier any payments made to the Client.

So don’t bid on jobs you won’t be able to perform.

“If you’ve like to talk about your Insurance Risk, contact me today. We can talk about your exposure, and potential gaps in your current coverage.”

Thank you,

Ryan H.

Please subscribe below for the RyanHanley.com Weekly Post Roundup! 

Related posts:

1. Performance and Payment Bonds
2. Builder’s Guide to Construction Bonds
3. Contractors: Your Work is NOT Covered
4. Credit Insurance – Worth Considering for Your Business?
5. Snow is Here: Winterize Checklist