Bid Bonds: A Guide for California Construction Companies
Unlocking Growth
In the California public works construction industry, projects are secured through a competitive bidding process long before the first shovel hits the ground. At the heart of this process is the bid bond; a tool that provides financial assurance to project owners and ensures the contractor is qualified to bid.
At Commercial Surety Bond Agency (CSBA), we provide the expert guidance you need to navigate bond programs. For many construction companies, bonding capacity is the number one item holding them back from growing their business. We focus on leveraging our decades of surety expertise to help you increase bonding capacity and pursue new opportunities.
Understanding the core function of a bid bond is a key step for any construction business looking to grow. Generally, if you are bidding on a government project, you will need to provide this backing to ensure your bid is considered “responsive.”
What is a Bid Bond
Bid bonds are a type of construction bond that protects the owner of a project during the construction bidding process. What the bid bond guarantees is that you, as the bidder, will compensate the project owner if you fail to enter into the contract and/or fail to provide the required performance and payment bonds.
A bid bond involves three entities:
- The Obligee: The owner of a construction project.
- The Principal: The contractor bidding on the work.
- The Surety: The bond company that issues the bid bond to the contractor.
When and Why Bid Bonds Are Required
In California, projects that are funded with public money require bid security in the form of a bid bond or cashier’s check when a contractor submits their bid. This applies to federal, state, and local government work. Bid bonds are also becoming increasingly common for private commercial projects, making it essential to understand when this requirement applies to your bidding strategy.
Bid bonds serve a critical function: they can be the key to a contractor getting an opportunity to pursue a project, and they ultimately protect the project owner by discouraging contractors from submitting bids they never intend to truly honor.
Understanding the Miller Act and Little Miller Act
If you pursue government work in California, you will encounter the Miller Act and its state-level equivalent, the Little Miller Act. These laws exist to protect tax payers, as well as subcontractors, and suppliers on a public project.
- The Miller Act (Federal): This law applies to federal construction projects and requires contractors to provide a payment bond on projects over $25,000 and both payment and performance bond on projects over $100,000.
- The Little Miller Act (State): California has its own version of this law that applies to state and local public works. In California, the requirement for performance and payment bonds typically kicks in at a threshold of $25,000.
Navigating bid bonds for public works projects means ensuring your bonds are issued by a California-admitted surety. Choosing an expert partner is vital; it affects how easily you can meet these requirements and keep your growth on track.
How Much Does a Bid Bond
Cost in California?
In most cases, bid bonds in California are not charged a separate premium. Unlike typical insurance, bid bonds are service-based. When you are the low bidder on a project and awarded the contract, the surety bid bond provider then issues a performance or payment bond; that’s where they’ll charge a premium.
Typically there isn’t a premium charge for bid bonds. The surety will charge the premium when the performance and payment bonds are issued so it’s important to understand what your bond rate is prior to bidding, so you can factor that into your bid amount.
However, it’s important to know the premium rate you’ll be charged for the performance and payment bonds upfront, so you can include that cost in your bid.
For a detailed breakdown of bid bond costs and our free calculator, see our complete guide to bid bond costs in California.
Calculating Your Bid Bond Premium
The methods for calculating bid bond premiums involve looking at your total bonding capacity and the penal sum of the bond. If project scopes change, it is helpful to follow best practices for handling bid bond increases to keep your capacity aligned with your obligations.
How to Apply for a Bid Bond
Bonding is an extension of credit, so applying for a bid bond can feel like a process similar to applying for a loan. Bond companies need to determine if you have both the experience and financial capability to complete the construction project.
How a bond company determines that depends on the total job amount; not just the bid bond amount, and revolves around your experience, as well as the financial health of your company and you as an individual.
At CSBA, we differ from other agencies, because we have internal underwriters that guide you through this process step-by-step. We take the time to understand your unique situation and goals, which enables us to obtain the bonds you need quickly, so you can pursue the projects you are seeking.
For more details on what to expect during the underwriting process, read our full guide on how to apply for a bond.
What Having a Bid Bond Means
When a surety approves a bid bond, they are essentially letting the project owner know that they have prequalified the contractor and trust that they have the capability to successfully complete the project.
Moving from Bid to Performance Bonds
A bid bond is required at the time of bid to provide assurance that you will enter into the contract and provide the performance and payment bonds if you win. Once the contract is awarded, the bid bond is replaced by the performance and payment bonds. Understanding the transition from bid bond to performance and payment bonds helps with project planning.
| Feature | Bid Bonds | Performance and Payment Bonds |
|---|---|---|
| Timing | Submitted with the bid | Issued after winning the contract |
| Typical Penal Sum | 5% to 20% of the bid | 100% of the contract price |
| Primary Purpose | Assurance of contract entry and performance and payment bonds being provided. | Assurance of project completion with all subs, suppliers, and laborers being paid properly. |
Does It Matter Where I Get Bonded?
Yes. The type of professional you work with can impact your bonding experience and thus your company’s growth potential. Learn more about why it matters where you get your bid bonds.
An Insurance Agent
While an insurance agent can potentially issue a bond to a contractor and would require all the same documentation and information described earlier, it might not be a smooth process. This doesn’t mean they’re a bad insurance agent, but they likely don’t have the expertise in bonding to understand what sureties look for and how to get the contractor the best bond program available to them.
A Surety Specialist
A surety agent, or specialist, has dedicated their focus to surety bonds and helping contractors get bonded. Due to this specialization, they can form beneficial relationships with surety companies and know what it takes to provide guidance to contractors who need bonding. Beyond their experience and relationships, many surety agents have access to special programs others don’t, and they can provide guidance in how to structure the financial side of your business to help with bonding capacity for larger jobs down the road.
CSBA is just that, a surety specialist. We have been helping contractors with bid bonds since 1984, and our team has over 225 years of combined surety experience to guide you through the bonding process.
Bid Surety Bonds FAQ
What is the difference between a bid bond and a performance bond?
Bid bonds are required when contractors bid on a project and guarantee that if they are the low bidder, they will enter into the contract and provide any required performance and payment bonds. Performance bonds guarantee the contractor will fulfill all the terms and conditions of the contract.
Once your bid is accepted and you enter into a contract with the owner or general contractor, the bid bond is replaced by a performance bond; transitioning you from the bidding phase to the construction phase of the project. For a more detailed comparison of these two bond types, see our guide on bid bonds vs. performance bonds.
How long are bid bonds good for?
The length of time that bid bonds are valid is determined by the particular project owner you are bidding to. Some owners state the requirement in the specifications while others are silent. Many project owners require the bid bond to be good for 90 to 120 days after the bid, and some will ask for extensions when the project award takes longer than that time.
How are bid bond amounts calculated?
The bond amount, or penal sum, is usually 5% to 20% of the total bid. For details on how we review these amounts, see our guide on how bid bonds are calculated.
What if my bond is set to expire?
The bond amount, or penal sum, is usually 5% to 20% of the total bid. For details on how we review these amounts, see our guide on how bid bonds are calculated.
What happens if a bid bond is called?
A called bond occurs if a contractor wins a bid but fails to sign the contract or provide the performance and payment bonds. This can lead to financial loss and make it harder to get bonds in the future. Explore the details of what happens when a bid bond is called.
What’s the difference between a bid bond and a bid security?
A bid bond is a form of bid security. Bid security relates to having a legal guarantee that the contractor will compensate the project owner if you fail to enter the contract and provide any required bonds.
What’s the difference between a bid bond and a bid guarantee?
The terms bid bond and bid guarantee are the same and are/can be used interchangeably. The whole term is actually ‘bid bond guarantee’.
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