Bid bonds are a type of surety bond that is required when submitting a bid proposal on a public works project. However, a bid bond can also be required when bidding on private projects. Therefore, whether your work is focused in the public or private sector, it’s important to understand what bid bonds are and where it is best to obtain one. While it’s easy to assume it doesn’t matter where you get a bid bond from, going to a specialist makes a difference.
Before we discuss your options for bid bonds, let’s go over what it is and how they work.
What is a Bid Bond?
A bid bond is a type of surety bond required by law, to bid on construction projects that are funded by federal, state or local tax dollars (also known as public works projects) and as mentioned above, can also be required on private projects. The bid bond guarantees that the surety company is willing, in good faith, to issue the performance and payment bonds required by the contract, if the contractor is low and awarded the contract. In addition, it also provides the owner of the project protection during the bidding process, should the contractor backout of a low bid erroneously, because the owner can then call on the bid bond for financial compensation into the contract or provide any required bonds, like a performance or payment bond.
The bid bond is considered an assurance that the contractor bidding on the job is financially stable and has the resources to handle the project. In a sense, it can be considered a pre-qualification tool.
How Bid Bonds Work
The bid bond involves three parties:
- The obligee: the owner or general contractor who is requiring the bond.
- The surety: the bond company providing the bid bond
- The principal: the contractor or subcontractor who needs to be issued the bond for their bid
To successfully apply for a bid bond, the surety company will be looking to review different types of documentation and information:
- Your credit score
- The bid date and scope of work
- The length of time your construction company has been operating
- Depending on the size of the bid, financial information might be needed
- Your track record of profitable projects completed
- The labor and equipment that is available to you for finishing the project.
The process to get a bid bond typically isn’t dissimilar from applying for a loan, as you can see from some of the factors listed above. These elements also determine the size of the bid bond you qualify for and your bonding capacity (or the total amount of work a surety is willing to support at one time). If you think any of these things might be an issue for you, we strongly encourage you to read here on how to improve your bonding capacity: 3 Things Contractors Can Do to Increase Bond Capacity Immediately – CSBA
What does a Bid Bond Cost
How much a bid bond costs depends on several variables, like the factors listed above. Typically, there is no charge for the bid bond, but surety companies will charge a premium for a performance bond or payment bond when and if you’re awarded a contract. Therefore, it’s important to include the price in your bid, even though the bid bond didn’t cost anything. To learn more about how to lower premium costs, we recommend you read here: How to Best Position Yourself for the Lowest Surety Bond Cost – CSBA
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Bid Bonds from an Insurance Agent
An insurance agent is capable of issuing a bid bond and they’ll require all the documentation and information listed earlier, but it isn’t the best choice for the surety bond. The reason why seeing an insurance agent, whether they’re a longtime agent of yours or not, is that they lack the professional expertise that can make for a smooth bonding process. They wouldn’t have a reason to form relationships with surety companies or understand how bonding can better a contractor’s business. The lack of knowledge and relationships can easily lead to a bid bond application being denied by a lack of proper preparation or being paired with the wrong surety company, not to mention the higher premium rates.
While it’s true you can get the required bid bond from an insurance agent, they won’t be able to provide you with the direction or information needed to make it an easy and beneficial process.
Bid Bonds from a Surety Agent
The other option you have to obtain a bid bond is through a surety specialist. These agents’ entire professional life is dedicated to understanding surety bonds for contractors and with that, have developed the necessary relationships with surety companies. Due to having these connections with surety companies, they often have access to special programs that others don’t, and know construction-oriented CPAs that can ensure your financial records are in good order, which helps secure the bond.
On the cost end, they can guide you on how to get lower premium rates and take an interest in seeing you succeed, as minimizing your business’s risk helps minimize the risk of bid bond claims. It’s a case of everyone winning. A surety expert has the necessary reason, motivation, and experience to help structure your application and business to prepare you for a greater bonding capacity as they guide you through the bonding process. This is the most significant benefit to working with a surety agent over the other options for bonding needs.
Why it Matters Where You Get Bid Bonds
Ultimately, the decision is yours and depends on your larger goals. If you’re wanting a bid bond to get this job and move on, then either an insurance agent or surety specialist will do. If you want to use it as an opportunity to grow your bonding capacity and your business, then a surety expert is the right choice to make.
We at CSBA are entirely dedicated to surety bonds and helping California contractors grow their company while getting the bid bond they need for the project they want. With over 225 years of experience, we are well versed in helping both seasoned contractors and newer companies get the bonds they need. We have the key relationships, the expertise, and the first-class service required to ensure a smooth bonding process.
The decision on who you partner with to get a bid bond matters because of what can be done on your way to getting it, successfully obtaining a bond, and the opportunities that follow the bid bond being issued.
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.
