In simple terms, Bid Bonds are issued within the framework of a bidding process to serve as a guarantee to a project owner that a winning bid will satisfy the terms of a tendered contract.
During a bidding process, a contractor, who is also referred to as the principal, registers a bid on a potential project, and provides a bid bond. That bid bond pre-qualifies the principal, and also provides a guarantee to the project owner that the principal will fulfill the contract, when awarded.
BID BOND STAKEHOLDERS
In essence, Bid Bonds are designed to protect the interests of various stakeholders, including those who are participating in federal, provincial and municipal projects. For the contractor, a bid bond represents a serious offer, and a legitimate prequalification for the project at hand. For the project owner, who is also referred to as the obligee, the bid bond represents a security guarantee, that the principal is positioned to commit and complete the contract, when awarded.
The basic premise behind Bid Bonds is to protect stakeholders. For example, when a principal fails to fulfill a bid, the obligee is guaranteed a payout that is equal to the difference between the principal's original tendered price quote, and the next closest price quote. Of course, this provision is only initiated if the principal is awarded the contract, but fails to fulfill the obligations of that contract. The bid bond penalty is generally ten percent of the bidder's tender price.
Project owners, general contractors and other parties also use Bid Bonds to establish and confirm the efficacy of the bidding contractor or supplier. It’s a mechanism that endorses the bidding contractor; affirms the ability and capacity to fully undertake the project; and demonstrates direct support from a recognized Surety Company. In short, the bid bond formally assures and guarantees that a successful bidder will execute the requirements of the contract, and duly provide the required surety bonds.
BID BOND OBLIGATION
Beyond commitment, Bid Bonds verify for the project owner that a contractor can actually comply with all of the pre-requisites as defined in the original contract bid. In addition, there is a built-in guarantee that the contractor has the full capacity to take the project on; to execute the defined parameters of the project; and to complete the work to the satisfaction of the project owner. This aspect is critically important, since project owners may not readily know if a contractor is financially stable enough to handle the project from end to end. In a worst-case scenario, a bid bond creates a comfort zone for the project owner, who knows that if the project is won by a certain contractor, and not undertaken, compensation is available from the surety bond.
With regard to project failure, and in an unfortunate scenario where bid bond obligations are not fully accommodated, the principal (usually the contractor) and the Surety Bond company are both liable. Penalties vary according to agreements signed, and quite often the liability on the bond will include additional expense outlays that the project owner might incur in assessing, selecting and awarding the project to another contractor. In general, penalty sums are between 10% and 20% of the bid amount.
BID BOND ORIGIN
The rationale behind Bid Bonds is well founded. Clearly, the process dissuades contractors from submitting bids that are not serious. As well, the bond-issuing company performs very valuable services: comprehensive credit checks to ensure business viability; financial background checks to ensure stability and solidity; and various legal and regulatory tasks to round out the process. For the contractor, whether the project is in the government sector or the private sector, bid bonds allow for a reputable and competitive position amongst many other bidders. In fact, there are surety-bonding capabilities that must be met in order to be approved on many bidders’ lists, and to be invited to bid on certain projects.
Historically, contractors were in the habit of submitting low bids in the hope of securing a contract based on that low bid. After securing the work, and as the job progressed, contractors would insist on more money, and often refuse to finish the project, mainly because they had under-bid and could not realize a profit. Bid Bonds are the natural deterrent to these kinds of business practices, and offer a guarantee of financial integrity in a business sector that requires security for both the project owner and the contractor.
BONDING COMPANY PROCESS
A Surety Bonding company is the one that underwrites and issues a bid bond, and acts as the guarantor on behalf of the contractor. At the same time, with a bid bond in place, a project owner feels confident that the Surety Bonding company will stand behind the bidding contractor, and ensure the financial security of the project in case things derail. A reputable bond brokerage firm provides the unique expertise required to handle the Bid Bonds process from start to finish – whether it’s local or international. In an industry that is client driven, a good firm will engage surety partners who are also experts in the field – after all, the service approach must suit each client’s specific pre-requisites, while satisfying their business objectives.
A solid Surety Bonding firm also provides advice and counsel that comes from years of experience, and from a broad range of business sectors and industries. They must be knowledgeable when it comes to understanding risk levels, and well suited to negotiate competitive rates, and contractual terms and conditions. Obligees receiving Bid Bonds rely on the integrity and trust of participating stakeholders, all in an environment that includes competing interests and trade-offs.
In the end, project participants are all striving for success. Each of them in their own way - the contractor, the project owner, even the supplier, or sub-trade are focused on their own business interests and the bottom line that keeps them solvent. Bid Bonds serve to legally protect all of them, while creating a comfort zone in a complex landscape, where significant amounts of money are at stake.
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