Every once in a while, a project owner or general contractor will take a long time to award a project. If the project award drags on, this uncertainty can leave the contractor that bid the work in a tough spot for several reasons. The contractor may not want to bid other work in fear of overloading their resources, it can tie up their bonding capacity, particularly if it is a large job, or it could put them at risk for changes in material prices. The natural question then is how long does their bid bond stay valid, which we will address in this article. Before we dive in, we will provide the usual disclaimer that we are not lawyers and therefore, this will not constitute legal advice. This will hopefully give you a general framework, and given each circumstance can be different, we recommend that contractors reach out to their attorneys to address particular situations.
Tying Up Available Bond Capacity
Before getting into the details of the various factors that govern the timeframe a bid bond stays in force, it’s important to understand how surety companies view bid bonds and the impact on available bonding capacity.
Bid bonds are usually only for a percentage of the potential contract value such as 10% to 20%. This leads some contractors to believe if they are bidding a $1 million job with a 10% bid bond requirement that it only will take up $100,000 of their available bonding capacity. However, since surety companies are guaranteeing to provide the performance and payment bonds when they issue a bid bond, sureties count potential contract awards as part of the contractor’s backlog at full value of the contract. Therefore, in this example, the pending project uses the equivalent of $1 million of the contractor’s bonding capacity. That may not be a big deal if the contractor’s total aggregate bonding capacity is $30 million and there is plenty of available room. However, it may be a huge deal if the contractor only has $2 million in total bonding capacity.
California Law
California Public Contracting Code – PCC § 20483 outlines the requirements for bid, performance, and payment bonds in public construction work. It states that upon award of the contract, the bid security of the unsuccessful bidders shall be returned no later than 60 days after the award. It does not, however, seem to state how long the bid bonds will be retained or are valid when the contract has not yet been awarded.
Federal Law
FAR Part 28 – Bonds and Insurance does not appear to state specifically how long bid bonds have to be valid for. However, it does mention if a letter of credit is used “…as a bid guarantee, the ILC [irrevocable letter of credit] should expire no earlier than 60 days after the close of the bid acceptance period.” This may imply that bid bonds also need to remain in effect for at least that long.
Under the Definitions section of FAR Part 28, it states “Bid guarantee means a form of security assuring that the bidder: (1) Will not withdraw a bid within the period specified for acceptance…” This seems to indicate that the time period for acceptance of bids, and therefore how long the bid bond will be valid, will be indicated in the bid documents or specifications.
Bid Documents
Oftentimes, the bid documents will specify how long the bid security can be retained by the municipality. A typical range is from 60 – 120 days. This isn’t always the case though. For example, in bid instructions from the City of San Bruno it states, “The City may retain bid securities and bid bonds of all bidders for a period of 90 days after award or full execution of the contract, whichever occurs first.” It’s important to note here that this does not define how long the City has to award the contract from the date of the bid.
The City of Pleasant Hill approached it slightly differently in one of their Notice Inviting Bids for a project in which they state, “Bids shall be valid for a period of 90 calendar days after the Bid opening date.” This likely means the bid bond would be enforceable for this same period of time.
Bid Bond Extensions
After the timeframe for a bid bond’s enforceability has passed, some project owners, such as the City of Los Angeles, will ask contractors to provide a letter from their surety company extending the bid bond to give the owner more time to award. The letter typically has to be notarized, include a power of attorney for the signor, and it should state the specific date the bid bond is being extended to so as not to leave it open ended. Usually, the project owner will specify this date or timeframe to the contractor. It’s important to note that contractors do not have to provide this letter if they don’t wish to extend the bid bond, but if the project remains attractive, our experience is that most contractors do.
Conclusion
When bidding projects, contractors will want to familiarize themselves with the requirements of the bid documents or owner they are bidding to in order to understand how long their bid security will be required for. This is particularly important in situations noted above where a contractor has limited bonding capacity, the project is large, or where fluctuations in material could impact the profitability of their estimate.
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