Bid Bonds have become a necessity in the construction field. Not that long ago, unscrupulous contractors could issue low-ball bids to land a contract and then later try to increase the price or simply refuse to finish the job. The emergence of Bid Bonds eliminated those types of shady deals. Today, Bid Bonds are a mandatory aspect of almost all commercial and residential construction.

What they are
Bid Bonds are typically required when a contractor is bidding on a construction project. These surety bonds guarantee that the contractor has the financial standing to accept the job if it is awarded the bid. The Bid Bond also ensures that the bond issuer will make good on a Performance Bond upon the awarding of the contract.

Bid Bonds also provide financial protection for project owners. If a contractor is awarded a bid but ultimately fails to start the work, the project owner can file a bond claim and recover the difference between the lowest bid and the second-lowest bid.

Withdrawing a bid
In general, contractors are allowed to withdraw a project bid before the bids are officially opened. There are also cases where developers allow bids to be rescinded without financial penalty. But in most cases, once the process is complete and the project has been awarded, contractors who bit off more than they could chew will have to take a financial hit for withdrawal.

How to get a Bid Bond
These bonds are typically issued by surety companies or insurers. Finding an agent who specializes in construction bonds is always a good idea. Contractors will have to submit a host of financial and even personal information in order to secure a valid bond.

The underwriting process for  bid bonds is stricter today after a wave of contractor defaults in recent years. Previously, the market relied on looser practices. Now, contractors can expect to submit the following types of information:

• Application - Includes basic contact information.
• Owner’s Resume - Provides an overview of the contractor’s experience and potential ability to complete the project.
• Business Financial Statements - These will include tax records, revenue statements and a host of other pertinent financial documents so that sureties can have confidence in the financial standing of the applicant.
• Owner’s Personal Financial Statements - Sureties will also evaluate the personal holdings, credit history, income and other financial elements of the applicant.

In most cases, contractors must sign an indemnity agreement that insulates the surety against financial loss. Any bond claims paid out by the surety will ultimately be recouped from the contractor. Surety companies utilize a rigorous underwriting system to ensure they’re not on the hook for losses.

Small Businesses
The U.S. Small Business Administration provides a surety program for small businesses. Through September 2010, the SBA is guaranteeing bonds for public and private contracts up to $5 million. The guarantee rises to $10 million for some qualified federal contracts. This program aims to help smaller contractors who might otherwise struggle to get bonded through traditional channels.

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Kevin Kaiser is a principal with Surety Bonds.com, a nationwide surety bond agency.  Please visit surety bonds to learn more about contract bonds or request a quote.

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We have a guest blogger.

Kevin Kaiser is a principal with Surety Bonds.com. He graciously offered to share his insights about bonding with our community. We hope you find his series on bonds to be helpful. Without further ado, here’s Kevin’s introduction to contract bonds.

Contract Bonds

Contract Bonds, often called Construction Bonds, are common financing and risk-mitigation tools utilized across the country. They’re a part of construction projects big and small, from city libraries and sewer plants to residential structures and hospitals.

In all, there are seven major types of contract bonds — there isn’t a single “contract bond” that can be issued. These seven forms cover a host of needs and provide financial protection for project owners. In short, contract bonds are basically three-party agreements that guarantee a project’s completion and provide an avenue for financial compensation in the event of default or some other problem.

How do they work?
These three parties are the principal, who performs the work; the obligee, the receiver of the work; and the surety, the third party guaranteeing that contracts are followed. For example, contractors must obtain payment bonds on public works projects guaranteeing that workers and subcontracts get paid according to their contract. If the contractor fails to pay or defaults, the payment bond ensures workers get paid — and that the project owner, the obligee, is protected against any financial harm.

Contract bonds are required on all federal projects valued at $100,000 or more. But state and municipal agencies also typically require contract bonds for public works projects. Even private developers and enterprise may require these standard surety bonds.

How are they issued?
Insurance companies and standalone surety bond firms are the most common issuers of surety bonds. These operations employ strict underwriting procedures, as surety companies do not want to be on the hook if a company defaults halfway through a project. Contractors will engage in a formal application process, which typically includes information such as:
-Credit profile
-Business financial statements
-Resumes for managerial team
-Personal financial statements
-Personal credit profiles

What do they cost?
The cost of contract bonds varies, often depending on the individual applicant, project and surety. They typically cost anywhere from 1 to 15 percent of the contract amount. Rates fluctuate depending on the nature and complexity of the contract and the financial standing of the applicant. Applicants with less than stellar credit or financial profile may be able to secure bonding from high-risk issuers, but those rates will be higher.

What’s next?
Over the course of the next few weeks, we’ll provide a snapshot of each of the seven major contract bonds. Next time, we’ll discuss Bid Bonds.
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Kevin Kaiser is a principal with Surety Bonds.com, a nationwide surety bond agency. Please visit www.suretybonds.com to learn more about contract bonds or request a quote.

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