What is a Bid Bond and Why Do You Need One?

As a contractor, you will have to win bids if you want to gain projects and income. But what if you put in the wrong cost for a project? Project owners are never happy when expenses end up being more than they agreed to. So, what can you do to protect yourself and your clients? That's where a bid bond comes in. What exactly is a bid bond and why do you need one? Keep reading to find out.

What is a Bid Bond?

Depending on your type of work, you may need to bid on projects. It's the nature of contracting work. Knowing how to make an accurate bid is essential to contracting success.

You may slip from time to time. So who covers the cost if a project ends up requiring more money than the project owner agreed to pay for the job?

If you obtained a bid bond and won the bid, you'll be given a performance bond by the bond issuer. Think of the performance bond as a type of customer insurance. Even if the price goes beyond what you thought, your customer will stick around because they are protected from paying any extra. A bid bond guarantees that the project owner won't have to pay more than the amount that was agreed to. Typically, bid bonds are agreements between a surety agency, a contractor and a project owner.

Bid bonds help contractors honor the bids they've made once a contract is signed. This gives project owners greater confidence in choosing a contractor. Bid bonds assure project owners that contractors are able to financially handle a project. Once the bid is won, a performance bond is used to protect the project owner.

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If a contractor raises their price for the project, they've probably broken the contract. This leaves the owner looking for a new contractor. Any money the project owner has to pay over the originally agreed-to-cost is covered by the bid bond. Contractors shouldn't lean on this as an easy way to get out of a contract. Be aware that surety agencies may sue contractors to recover costs they cover because of broken contracts.

What Does a Bid Bond Cost?

The cost of getting a bid bond will fluctuate depending on several factors. Things that may be taken into account include the following:

 - The cost of the project

 - The contractor's financial history

 - The project location

 - Who the owner is

The amount a contractor pays for the bond is called a bond premium. If the project is small, the premium may be a small flat fee of a few hundred dollars. It may even be free in some instances.

For large projects, the bond premium will fluctuate from project to project. This is because it's calculated as a percentage of the project's total cost and the bond's penal sum (the amount of money covered by the bond). Bid bond percentages are generally around 5-10%.

Why Do I Need a Bid Bond?

Bid bonds provide security, but they also get your foot in the door. It's likely that a project owner won't consider your bid at all unless you have a bid bond. When other contractors come to the table with bid bonds in place, why would they choose you over them? The answer is, they won't.

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Project owners need to know they will get their job done. So, they will choose contractors who can guarantee their services. A bid bond lets them know you're capable of doing the work and assures them that they will get the job done for the lowest price offered. For example, if the owner accepts the lowest bid and the lowest bid backs out, that bidder's bid bond will cover the difference in cost between their bid and the next lowest bid. So ultimately you need a bid bond to provide client confidence. If a potential client doesn't feel comfortable accepting your bid, they will go with someone else. To fix that issue, make sure you always have a bid bond.

How to Get a Bid Bond

In order to get a bid bond, you will need to contact a surety agency. You'll work out the terms of the bond with them. Agencies look at several things during the bond application process, including your personal credit score. This helps them assess the risk they are taking in providing you with funds. They will also consider the dates of your bid, the bid amount, how long you've been in business and whether you've been bonded before. You will need to submit more information if you're seeking a substantial bond.

A Word of Caution

Once you've placed your bid, it's there to stay for the most part. Withdrawing your bid could lose your bid bond, which would leave you financially responsible for the amount.

If you've already placed a bid for a project, don't withdraw it unless the owner hasn't opened the bid yet. There are other cases where you may not be penalized, but play it safe and only bid if you're dedicated to seeing things through.

Bid Bonds: Don't Bid Without Them

Bid bonds are essential for professional guaranteed bidding on construction projects. In most cases, you must obtain one if you want to be taken seriously by the project owner and for some Public projects it will be required.

To ensure your projects go as smoothly as possible, hone your cost assessment and bidding skills. Be as accurate as possible when making bids - don't just bid lower than all the others. 

As you bid on future projects, keep this info in mind. The better prepared you are beforehand, the better your bidding experience will be.