Construction bid bonds are very rarely called. In fact, in our agency’s history, we’ve only seen three bid bond claims. When you consider we issue more than 3,000 bid bonds each year, that’s not very many claims. While that’s positive for contractors, it can also give a false sense of security that bid bond claims never happen. This article will look at the situations when you can have a claim against the bid bond and what the liability would be in such a situation.
What is the Purpose of a Bid Bond?
Before diving into the calling a bid bond details, it helps to refresh ourselves about the purpose of a bid bond in construction. A bid bond is a guarantee by a surety company on behalf of the contractor that if contractor is selected by the project owner to do the work, the contractor will enter into the contract agreement and have their surety company provide any required performance and payment bonds. Bid bonds are used as a pre-qualification mechanism to ensure contractors submit responsible bids and that they are able to obtain the performance and payment bonds.
Can you back out of a Bid Bond?
The short answer is “potentially” in certain circumstances. When contractors make a mistake in their bid that was materially or crucially different than what was intended, they may be able to back out. California Public Contract Code PCC § 5103 states, “The bidder shall establish to the satisfaction of the court that:
- A mistake was made.
- He or she gave the public entity written notice within five working days, excluding Saturdays, Sundays, and state holidays, after the opening of the bids of the mistake, specifying in the notice in detail how the mistake occurred.
- The mistake made the bid materially different than he or she intended it to be.
- The mistake was made in filling out the bid and not due to error in judgment or to carelessness in inspecting the site of the work, or in reading the plans or specifications.”
We always recommend consulting your attorney to discuss the specifics of a particular situation.
Liability for Backing out of a Bid Bond
The liability under a bid bond is dependent on two factors. The first and most important factor is the language in the bid bond.
Most bid bonds are required for a percentage of the total amount bid. In public works construction that amount is typically 10% of the bid amount while federal projects require 20% of the bid amount. That percentage represents the maximum liability the surety company and therefore the contractor have under the bid bond.
The damages claimed by the project owner is typically the amount of the difference between contractors bid and the next bidder. So, if that spread is less than the amount of the bid bond, the entire bid bond amount may not be at risk.
Forfeiture Bid Bond Forms
There are certain bid bond forms that include what is referred to as forfeiture language. This means that if there is a valid claim on the bid bond, the surety company and contractor agree that the entire amount of the bid bond would be payable to the project owner even if the difference between the bidders is less than the full amount of the bid bond.
Protecting yourself against bid bond claims
The first step for contractors to protect themselves against bid bond claims is to read the bond forms to know whether there is forfeiture language.
Next, always review bid results immediately to find out if you are the low bidder and whether there is a significant bid spread. This will give you an opportunity to review your bid, if necessary, to confirm there were no errors within the allotted time frame under California law.
Discuss any concerns with your attorney and surety agent immediately. A professional surety agent will have dealt with the situations before and will know how to guide you through addressing it with the surety company. They should also be able to give you a referral to a construction attorney if needed.
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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.