Bonds are a cornerstone of the construction industry as they protect all parties involved including owners, contractors, and subcontractors by ensuring financial security and legal compliance throughout the project including completion. Additionally, home and business owners are more likely to use contractors that carry them.
What a Bid Bond Is
- A bid bond is used as a guarantee that a bidding contractor is able and willing to enter into a contract and will honor their bid price. It also guarantees the contractor can and will secure any needed performance/payment bonds if awarded the contract.
- These bonds are most frequently used in large scale or government projects that have a competitive bidding process to discourage underbidding, prequalify a contractor’s ability to meet the terms of the project, and minimize any potential delays should a contractor back out after being awarded the contract.
- For the project owner, it’s peace of mind. If the winning contractor walks away from the project or is unable to meet all terms of the contract, the bond helps cover the extra cost of hiring someone else to complete the job.
- For the contractor it shows you’re serious and financially capable before they even hand you the job. It also levels the playing field by eliminating underqualified or financially unstable bidders while preventing low-ball offers by companies that can’t deliver at that lower bid.
- If a contractor wins a $1M project but backs out, and the next bidder wants $1.1M, the bid bond could cover that $100K gap (depending on bond terms), so the owner isn’t stuck paying the difference out of pocket.
What a Performance Bond Is
- A performance bond is used to guarantee the performance of the contract and protects against overall job incompletion. Project owners use these bonds to ensure projects are completed on time and on budget – basically it’s a “promise to complete the job” with legal backing from the bond.
How the Process Works
- Smith Bonds & Surety takes the guess work out of applying by working with you to gain all necessary information upfront and taking it to our carriers/underwriters.
- Our underwriters review financial statements for financial stability, working capital, net worth, and profitability trends. They will also ensure that the capacity needed to complete the contract is in place.
Common Misconceptions
- “I don’t need one unless I’m a big contractor.” Even a large contractor with a stellar reputation needs to demonstrate to the owner — and the owner’s stakeholders — that they’re committed, vetted, and financially stable for that specific project. This can also serve to protect reputation should something unplanned occur preventing the contractor from being able to start or finish the awarded job.
- “It’s just like insurance” A bond is a contract between the bonding company (surety) and the contractor (principal) and acts more like a guaranteed line of credit to be used by the project owner (obligee) if a claim is made. Also, unlike insurance, should a claim be made the principal is responsible for repaying the surety the full amount of the claim.
Special Regulations for Government Projects
- The Miller Act outlines guidelines for bonds on federal public buildings or public works projects above; it doesn’t apply to the private sector or state projects but some states have what is called “Little Miller Acts”. It requires the primary contractor for any project above $100,000 to file a performance bond and a payment bond.
- Under this act both performance and payment bonds generally require 100% of the contract amount. This protects subcontractors and suppliers as they can’t file liens against the project if they are not paid by the contractor and allows them to file a claim against the bond based on the terms.
Whether you have more questions or are ready to start the process give the experts at Smith Bonds & Surety a call today – 419-865-7300