A Bid Bonds Primer for New Commercial Real Estate Investors

When a new construction is planned, many contractors bid for the job and the developer is responsible for choosing the company who he thinks will do the best job for the lowest price. Once a bid is awarded, there must be some way of ensuring that the selected company will perform the work they pledged to do. This is where a bid bond comes in.

A Closer Look at the Bid Bond Process

Bid bonds MA are used in almost all public construction contracts, because they provide legal and financial protection to the developer, or the owner of the property. The bid bond assures the developer that the construction crew can meet the demands of the bid contract and can perform those duties at the prices agreed upon in the bid. The bid bond is purchased from a surety by the contractor.

Essentially, this is an insurance policy that guarantees the developer will not lose money on the deal. If the contractor fails to meet their obligations, the surety will cover the damages up to the penal sum, or the previously established value of the bond. Typically, the penal sum is between 5% and 20% of the total bid amount.

The bid bond helps to protect developers from unscrupulous contractors, who might otherwise submit extremely low bids to win the contract. Later, they may raise the prices they quoted in the bid or fail to complete the job altogether. The bid bond provides security to the developer, reducing the risks of facing this type of situation.

In the event that a contractor doesn’t meet the terms of the bid, the contract will be broken. The developer is forced to seek out the next lowest submitted bid, which means they will have to pay more money for the job than anticipated. This is where the bid bond pays out, providing compensation to make up the difference between the price quoted by the initial winning bid and the second lowest bid.

Bid Bond Requirements

There are a number of requirements that contractors must meet in purchasing a bid bond for their projects. For instance, the Miller Act requires that bid bonds must be submitted for any construction jobs offered by the federal government. While the Miller Act only applies to government jobs, most development forms have adopted the rules set forth in that law as their own company policies.

This means surviving in the construction industry depends on your company’s ability to get bid bonds and the reputation your company has for complying with bids. Today, developers may not even let you bid on their projects without setting up a bid bond in advance. Additionally, some jurisdictions won’t issue building permits and licenses, unless there is a bid bond in place.

Finally, a bid bond can be granted in a number of ways. Most commonly, a surety agency will issue the bond. However, an individual can issue the bond, where it can be backed up by assets defined in the bond. This means they will have to have enough assets to cover the penal sum and they must be willing to put those assets up as insurance for the bond.

In a situation where developers and property owners have to depend on the integrity of contractors, surety bonds provide an extra sense of security. This is why a bid bond is essential to almost all development projects and helps to recognize construction companies with good business reputations.