Construction companies seeking work on public projects must obtain bid bonds. These guarantees ensure their ability to enter into contracts, should they be awarded one. In the event of withdrawal from such projects, owners of public works projects can file claims against these bonds with surety companies. Discover the best info about bid surety bonds.
Bid surety bonds must pass an extensive examination by their surety company, which includes evaluating the capital, character, and capacity of the owners.
Indemnity Agreement
As someone new to bonding, you may have many questions about indemnity agreements. They’re more than simply industry standards – they represent serious liabilities that could cost you significant sums if they’re misinterpreted.
An indemnity agreement is a legally binding agreement that requires principals to assume full financial responsibility for bond claims rather than passing them on to their bonding company. Therefore, it’s vital to choose an experienced bonding agency that can explain how bonds work, what guarantees are provided for under their bonds, and who bears liability in case claims are filed.
Indemnity bonds are typically governed by state statutes that may differ depending on your location. Regardless, their general principles remain the same: A bond is a contract formed when a surety provider agrees, for a fee (called a premium), to guarantee something. That guarantee is usually given to an entity known as an obligee – typically project owners in cases such as bid bonds and performance, labor, and material payment bonds.
Indemnity bonds give surety providers great power in terms of making payments, so they should include standards of good faith and reasonableness when issuing them. Otherwise, you could establish that they acted improperly when making a payout decision.
Performance Bond
Many service contracts, such as those for school bus services and janitorial services, require contractors to post bid surety bonds to be considered for them. Once awarded the contract, this bond acts as an insurance policy against contracts being entered into and guarantees proof of insurance, performance bonds, and any other documents needed by the client.
If a selected contractor fails to sign their contract upon receiving the project award, the project owner can file a claim against their bid bond to recover any lost revenue. It should be noted, however, that bid bonds don’t cover failures during construction; should such happen, the project owner may need to hire another contractor, and a performance bond would cover these expenses.
As with any surety bond, underwriters evaluate a contractor’s credit, financial standing, industry experience, and equipment needs to determine whether they qualify for a bid bond. This process may take some time and require documents like business and personal financial statements. Smaller amounts available through streamlined underwriting programs can help shorten this time.
Payment Bond
Bid bonds may not be required for every project, but they provide project owners with assurance that if their chosen contractor wins the bid, they will enter into an agreement and deliver performance and payment bonds as promised. This is an integral component of bonding that should never be underestimated.
When applying for a bid bond, surety companies scrutinize various aspects of a contractor’s capital, character, and capacity to undertake the work they are bidding on. The capital covers the financial strength of the business as a whole, the net worth of owners, and their cash-flow capabilities for undertaking new contracts. Character examines the history of completed projects along with the reliability of delivering on contractual obligations, while capacity takes into account experience and the scale of proposed projects.
Smaller bond amounts tend to be easier for sureties to underwrite, while for more significant contract amounts, they must conduct an in-depth review, including credit analysis and review of the business and personal financial statements, work-in-progress schedules for any similar jobs in the past as well as work progress records for comparable work being proposed for approval. That is why it is wise to consult a knowledgeable construction surety specialist in order to navigate through this complex bonding process and obtain what is necessary.
Withdrawal Bond
A withdrawal bond provides project owners with a means of protecting themselves financially from contractors who do not complete the projects they were awarded. Should a bidder withdraws or fails to provide required insurance policies and surety bonds, their obligations (known as obligees ) may file a claim with the surety company against their withdrawal bond, typically representing its value up to an agreed maximum or penal sum amount.
Note that the claim process for withdrawal bonds differs significantly from performance or payment bonds and requires cooperation from both principals and claimants (who may incur liability). Therefore, when accepting claim payments for bid bonds or contract surety bonds, it is advisable to consult a competent legal adviser prior to accepting payments, as claims may affect both parties financially.
Once a contractor has established an account with an experienced contract surety specialist, obtaining bid bonds becomes much more straightforward. A broker should assist the contractor in creating a “bond requisition,” providing the surety company with information such as the project name, owner details, tender close date, and estimated project duration.
Bid bonds typically cost 5-15% of the total contract value and often require a credit check or additional security requirements, such as letters of credit as collateral. An annual surety fee usually covers the costs associated with all bid bonds, surety consents, and prequalification letters issued through one facility.
