When contractors submit a bid bond request to their surety company, it is often early on in the bid process, and you may not have much insight into the true cost outside of whatever the project owner’s estimate is, assuming one is provided. That in itself makes it difficult to know what amount to submit bid bond requests for, and the challenge is compounded in today’s inflationary environment as many project estimates are way off.
The risk for contractor is if you bid way more than your surety approved, they may not be willing to provide the performance and payment bonds for the project on the same terms or at all. This article will provide simple tips for dealing with these situations and how to avoid the risks and liability that can come from poor communication.
How Bid Bonds Work
Bid bonds guarantee to the project owner that the contractor will enter into the contract and provide any required performance bonds and payment bonds. In the event the contractor doesn’t follow through, the project owner would be able to claim against the surety company up to the bid bond amount.
When surety companies approve a bid bond, they are basing their approval on the estimated amount of the bid submitted by the contractor. It is standard industry practice for surety companies to require contractors to notify them if their bid amount is going to be more than 10% of the amount that the surety approved the bid at.
Risks of Not Getting Bid Bond Increases Approved
For most contractors, bid time is a frantic and challenging experience pulling together last-minute subcontractor and supplier bids, making sure the bid form is filled out properly, and that the bid includes all of the required certifications for things like DVBE, DBE, SBE, and local hire rules. This causes some contractors to put communication with their surety at the back of their mind. Other times, contractors subscribe to the philosophy of asking for forgiveness rather than permission. Either way, it can create significant risks for the contractor.
One of the primary risks for the contractor is eroding trust with your surety company. That’s not to say one instance of exceeding an approved bid bond amount will cause this, but if your surety agent discusses this with you multiple times and the pattern continues, the surety company will eventually lose faith, and it could impact future bond approvals.
If the increase in the bid bond amount is large enough, a surety may even require conditions in order to approve the performance bond if you are awarded the contract. These conditions may be things like bonding subcontractors, using funds control, the SBA Bond Guarantee Program, or the surety may require collateral. These all include costs that you won’t have in your bid.
In a worst-case scenario, a surety may decline to provide the performance bonds for the contract. Just because a surety issues a bid bond to a contractor, they are not obligated to provide the performance bonds, and this can leave the contractor scrambling to find a new surety company. If one can’t be found, the contractor will be on the hook for any liability under the bid bond as a result of a claim by the project owner.
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Effective Ways to Manage Bid Bond Increases
The easiest way to handle bid bond increases is to submit your bid bond requests at an amount higher than the owner’s estimate. We usually recommend 25% to 50% higher in today’s inflationary environment. This will cover most situations, and if the job is within your normal bonding capacity, the surety will easily approve it. However, it’s important to keep in mind that this doesn’t alleviate your responsibility to communicate with your surety company if your final bid amount exceeds this higher estimate.
For projects that are at the upper end of your bonding capacity, you simply need to stay in closer communication with your surety agent and put it as a higher priority for these bids.
Good Communication is the Key
Good communication is key to any relationship and surety bonds are no different. Having this with your surety agent and surety company will build trust and create a much smoother relationship over the long-term.
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