What a bid bond is, when it’s required, and what the requirements are to get one are all important things to understand as a contractor. They are often an important part of getting the construction jobs you’re after and failing to understand the process of getting one not only can cost you the bid but can cost you money as well.
Before we discuss when a bid bond is required, we’ll discuss what it is, what you need to get one, and then detail when it is mandatory to have.
What is a Bid Bond?
A bid bond is a type of surety bond that guarantees the bid you submit for a job and that you will post a performance bond if awarded the contract. If the project owner finds that you are unable to fulfill the contractual obligations of your bid, a claim can be made against your bid bond.
Essentially, the bid bond protects the project owner during the bidding process by ensuring you will compensate them if you fail to enter into the contract and provide any performance or payment bonds required.
What are the Requirements for a Bid Bond?
The process to get a bid bond isn’t unlike applying for a loan. The surety provider will examine your experience and financial capability to finish the construction job you’re bidding on. How a bond company determines whether or not to give you a bid bond involves looking at a few different elements:
- Your credit score
- The length of time you’ve been in business
- The financial resources available to complete the project
- Your track record of profitable projects finished
- The labor and equipment you have to complete the job you’re wanting a bond for.
Typically a bid bond is required to be 10% of the total contract amount. What this means is that if the contractual amount of the bid is $750,000, then your bond should be $75,000.
If you’re wondering what the cost of a bid bond is to the contractor, you’ll be happy to know that there is generally no charge for them. Surety companies typically charge a premium for performance or payment bonds instead.
When Do I Need a Bid Bond?
A bid bond is required when the project owner requires it or if the job is using public dollars, such as a government project like infrastructure. This applies to all government levels, whether local or state, or federal. If this is the case for the bid you’re interested in winning, then a bid bond must be obtained before bidding on the state or project that deems it mandatory.
It’s important to note that unlike other types of surety bonds, bid bonds do not “cover” anything beyond the project owner’s losses if the contractor cannot fulfill the obligation of the bid. A bid bond is best thought of as a risk-management tool that communicates that the contractor is qualified for the job.
As part of CSBA’s ongoing commitment to financial literacy among California contractors, we encourage you to read this article regarding things to know about bid bonds when working on jobs in California:
A Bid Bond Company
Now that you understand the requirements and process of obtaining a bid bond, it’s important to know whom to work with to get one. Many contractors turn to their insurance agents for their bonding needs, but that would be like calling your foot doctor for back pain. It’s important to work with a surety agency that is deeply familiar with not only surety bonds, but the construction industry itself.
To fully understand why it’s important to work with a surety specialist rather than an insurance agent, we encourage you to read this article.
We at CSBA are committed to improving the financial literacy of contractors throughout the state, which is why we regularly publish articles on various types of bonds, tips on how to navigate the financial leg of the construction industry, and topics both seasoned contractors and newer construction businesses can benefit from.
Our approach to the surety bond process is what separates us from other surety agencies in that, this is our primary focus and our professional expertise. We not only help contractors get bonded but give you the tools to structure your business to be more attractive to surety providers, growing your ability to bid on larger projects.
Now that you know when a bid bond is required, it’s time to talk to the surety specialist who can get it for you.