When a contractor is required to obtain a bid bond, perhaps for the first time, you’ll likely come across information speaking to bid guarantees and wonder what the difference is between them and bid bonds. The surety world can be complex, with financial terms and processes that are alien to most contractors. Below you’ll find what you need to know regarding bid guarantees and bid bonds, how they factor into the project you’re bidding on, and how to secure them.
The Bid Difference
The difference between a bid guarantee and a bid bond is only the language. In fact, the whole term is actually ‘bid bond guarantee’. Using interchangeable terms can be needlessly confusing and mislead contractors into thinking they are required to obtain more than they are. Our goal with this article is to point you in the correct direction, provide you with an understanding as to what bid bond guarantees are, the process to get one, and how best to navigate that road successfully.
Now that you know that there is no difference between a bid guarantee and bid bonds, let’s move on to what a bid bond is and what guarantees it gives.
Bid Bond Guarantees
The bid bond works as a guarantee to the project owner. It guarantees that the contractor has been prequalified by a surety company, and the surety company is ready in good faith, to provide the performance and payment bonds if the contractor is low on the bid and awarded the contract. If the contractor fails to enter the contract and provide the required bonds, the owner of the project can make a claim on the bid bond, which is typically issued in the amount of ten percent of the bid.
A contractor who is required to obtain a bid bond is likely bidding on a construction project that is using tax dollars, such as a federal project. By law, these jobs require a bid bond guarantee from any contractor bidding on it to help prevent frivolous bidding, inappropriately low bidding, and fraud.
Essentially, a bid bond guarantees follow-through on the bid and that the proposed contractor is financially stable enough, with the right resources, to complete the construction project.
How to Get a Bid Bond
To obtain a bid bond guarantee, a contractor will need to prequalify with a surety company. While some contractors are tempted to go to their longtime insurance agent to handle the process, this isn’t the best idea. You can read more on why that is here.
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Applying for bid bonds isn’t a complicated process but it can seem that way if you’re not familiar with it. Surety companies and surety bond specialists need to know if you have the experience and financial capabilities to finish the job you’re bidding on. There are several factors that a surety company reviews when determining if they can support your bid bond need. Here are some of those factors:
- Your credit score
- The bid date
- The length of time your construction company has been operating
- The financial resources available to you to finish the job
- Your track record of profitable projects completed
- The labor and equipment available to you for finishing the project.
The size of the job you’re looking to bid will determine the level of information needed for underwriting. For projects under $750,000 for example, there are programs that are simply based off of personal credit and past experience, but for projects larger than that, more detailed financial information will also be needed. Regardless of the size, it is important to understand the underwriting process because any misstep can extend the processing time, risking you not getting the job or not being issued a bid bond big enough for it.
Bid Bonds and the Surety Bond Company
Whether you’ve been told you need to get a bid guarantee or a bid bond for the project you’re interested in, now you know it’s the same type of surety bond that has the same process for obtaining it. It’s great that you’ve taken the time to find what you need to do to secure the project for your company, and now that you have those answers it’s time to see who can help you get the bid bond you need.
We at CSBA write these articles to help California contractors gain a better understanding of bonding and to demonstrate our expertise in the surety industry. Our commitment is to growing contractor businesses by helping them increase their bonding capacity and guiding them through the process along the way.
It’s important and to your advantage to align with a surety agency that is entirely dedicated to knowing every aspect of surety bonds, specialists in the field. Being those specialists, we have a team of internal underwriters that can further guide you through the bid bond process step-by-step and take the time to thoroughly understand your situation and the goals you have for your company so we can advise on the best next move forward.
Aligning with CSBA means not having to look for articles like these anymore. You build California, we’ll help build your company.
Get a Bid Bond quote now
We want to know more about how we can help your construction company get the right contractor bond for your next project.