Bid bonds are used by project owners as a method of prequalifying contractors that submit bid proposals. They often have to have the financial credentials necessary to accept, perform and complete the job.
If a bid is selected and the contractor declines the job or retracts the bid, the owner can make a claim on the bond to collect the difference of the original bid and the next highest bid.
How much do they cost? Per industry standard, they are free with the expectation that if the contractor wins the job, they will get their Performance and Payment bond through the same surety that wrote their bid bond.
What is a Contract Performance and Payment Bond?
A contract bond is a type of surety bond that guarantees contracts are fulfilled. These are mostly found in the construction industry to ensure projects are completed according to the contract.
If the contracted party fails to fulfill its duties according to the bond’s terms, the project developer can make a claim on the bond to recover financial losses. By Federal Law, bonds are almost always required before work can begin on public projects. Private developers can require them as well.
The Performance part of the bond guarantees that contractors complete construction projects according to the contractual terms. If a contractor fails to do so, the owner can make a claim on the bond to access funds that can be used to pay another contractor to finish the job. The Payment part of the bond guarantees payment for services in the case contractors go bankrupt when working on projects. The bond amount can be used to reimburse those who worked on a project if the lead contractor is unable to pay them for their work.
How much do they cost? Costs can vary widely ranging from 1% – 4% of the bond amount. Generally, bonds under one million fall right at 3%, but each contractor is underwritten to determine the final cost of the bond. Credit, financials, and experience are the main driving factors in bondability and cost.
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