Ensuring that any contracted project is protected is an essential task. Whether you are at the receiving end or giving end, bid bonds can be confusing if not understood properly. A bid bond is part of the initial process of any contract-based job. It is one of the most important bonds a contractor and a project owner may know about. Understanding all the costs and other related information about the bidbond becomes urgent. They are a three-party contract system that acts as a perfect fix for underbid contracts.
What Are Bid Bonds?
Almost every construction process starts with bidding. This process involves eligible contractors submitting cost estimates for the required project to the respective owner. Bidding forms the most critical aspect of construction projects, as contractors with the lowest bid are generally awarded the projects unless there is any exception. A bidbond is issued as a surety bond for the contractor awarded the project. It guarantees that the bidder is qualified enough to complete the project.
Bid bonds compensate the project owners financially if the contractor cannot meet all the requirements. The contractor must sign the contract and pay the difference between the bid and the next lowest bid, not exceeding the bond amount. These bonds may be used elsewhere where the projects involve a similar bid-based selection process. These are necessary for project owners to be convinced about the winning bid.
A bid bond can be signed by a third-party person in the form of a written piece of paper, having the guarantee, after which a contractor is allowed to submit it to the project owner. It is a legal definition of a contractor’s reliability and financial ability to complete the project in hand efficiently. Performance bonds replace these bonds once the bid is accepted.
What Are Parties Involved In Bid Bond?
Usually, three parties are involved in a bid bond- a bidder, a project owner, and a third-party person. Bidders are one of the indispensable elements of the operational bidding process, where they issue bonds to project owners to safeguard the project in their hands. A project owner is the first party involved in the bidding process who raises the bids from various contractors to compare and contrast the cost estimations issued by multiple contractors.
A third party person is the last party involved. They are the guarantors who provide written guarantees for the contractor. It is after this process that a bidder can issue the bid.
How Much Does A Bid Bond Cost?
The price of a bid bond depends on various factors – the cost of the project, the location, the owner, the contractor, and their reputation. These factors play a significant role in deciding the bond’s price and the premium the contractor pays the owner when the bond is issued. The cost varies from minor to larger projects, beginning at $200 for smaller projects. For larger projects, the price is generally a fraction of the total cost ranging from 5 percent to 10 percent.
Benefits of Bid Bonds:
Bid bonds, when issued, provide a sense of security to both the major parties involved. They are legal documents guaranteeing the project to the contractor and acting as a surety bond for the project owner. The significant benefits are:
- It ensures the project owner has a third-party undertaker who takes the contractor’s guarantee in written terms.
- The project owner has security when the winning bidder refuses to perform the project.
Without a bid bond, the issue may end up in court in case of any discrepancy. Once the project has been completed, these bonds can be returned. Understanding that bid bonds form an essential part of the process is urgent, as, without proper knowledge, you may enter into a troublesome contract.