In earlier times, when there were no contract bonds, contractors would often default on their contractual obligations. Sometimes a contractor refused to complete the project at all. It could be because the contractor forgot to factor in the real cost of the project or because it encountered a problem that made it impossible to complete the project as required. Such defaults and abandoning of projects resulted in financial losses to project owners. To overcome these problems, contract bonds were developed. Now such bonds have developed into well-laid plans. These bonds are now a part of all construction projects involving contractors. In fact, it is mandatory and required under the California laws. There are different types of construction bonds including a bid bond.
Why Do Project Owners Require Bid Bonds from Contractors?
When a contractor defaults on its promise, it creates a ripple effect that can jeopardize the whole project. Delay in a completion of the project can cost hundreds or thousands of dollars depending on the type and cost of the project. The owner tries to minimize such risks by using construction bonds. Construction or contract bonds are a type of surety bonds. It is a financial guaranty from the contractor to the project owner. The owner is guaranteed that the contractor will abide by the terms and conditions of the agreement. A bond helps distribute the risks to multiple stakeholders of the project.
Different Types of Contract Bonds
There are three parties involved in a contract bond. The first is the project owner, the second is the contractor, and the third is company issuing the bond. In the bond contract parlance, the project owner is referred as obligee, the contractor is principal, and the company that underwrites the bond is surety. If a contractor defaults on its obligations, the project owner requires the bond issuer to remedy the default. Construction projects involve four types of bonds including bid bond, performance bond, materials and labor bonds, and lien bonds. Each bond is required at a different stage of the construction process.
What Is a Bid Bond?
Under the terms of this bond, a project owner is guaranteed that the bid will be accurate and the contractor will submit a performance bond. The contractor can be held liable if it submits an inaccurate bid, fails to submit a performance bond, or backs out of the project. It is a first bond between the contractor and the project owner. It provides assurance to the project owner that the contractor has good financial standing and will fulfill its contractual obligations. The contractor has to pay out on the bond if it fails to honor the bid. The payout amount can include payments for legal expenses. A claim can be filed against the contractor if it fails to abide by the terms of the bond. Some contractors underestimate the total cost, forget to include a major expense, or encounter an unexpected problem that makes it difficult for them to fulfill the bid terms and conditions. Any such problem can force a contractor to default on its bid obligations. When the principal fails to honor the bid terms, both the principal and surety become liable for the additional expenses incurred by the project owner in finding a replacement contractor.
Who Requires a Bid bond?
This type of bond is required by both government departments and general contractors. The bond is needed in contracts involving construction projects.
The Cost of Bid Bond
It can cost a hundred dollar to a few hundred dollars, depending on various factors related to the contract. The amount depends on the bid packet. It varies from 5-15 percent of the bid price. It means if the contractor fails to fulfill the bid term, the project owner can claim this much amount from the surety provider. The contractor can take cover for all bid bonds required in a year.
How to Obtain a Bid Bond?
This bond is available from a surety agency. Our company is a well-established surety provider. We work in partnership with insurance companies to underwrite bonds to California construction contractors. We can issue low amount of bonds on a simple application, but bonds with higher amount require more information about the contractor company and its owner. Depending on the type of bond needed, we require information like project cost breakdowns as well as personal and business financial statements of the contractor.
The Next Step after Winning the Bid
The main purpose of the bid bond is that the contractor will enter into an agreement with the project owner if the contract is awarded to it. The contractor has to provide all necessary items needed to fulfill the contractual obligations of bidding. Such items include a signed contract, performance bond and proof of insurance. The bid guarantee is released after these items have been submitted.
The contractor must have the resources needed to fulfill the contractual obligations related to the project. It must have right skill sets and it should be able to perform all tasks required under the contract. It is incumbent on the surety to verify an applicant’s financial statements, credit rating and work history before issuing the bond.
How to Apply for This Bond?
Just call us with your bond requirements or fill the web form here. Our simple online form makes this process fast and easy. Small amount requests are processed faster while the larger amounts can take some time. Provide complete and accurate information for faster processing of your bond request. Requests by established contractors who have the good record of honoring their bonds are also processed faster.
Applying for a contractor’s bond does not have to be a cumbersome process. We have made this process quite easy for all types of California construction contractors. We have special plans for contractors with low credit rating. There are various bond solutions for all types of contractors. You will receive a customized solution according to your specific bond requirements and preferences. Call now to request a bid bond. Make your bid a strong contender for winning the project order with the help of our bonding expertise.