Explain What Is a Bid Bond
A bid bond ensures that a contractor will not cancel his bid on a project, and will provide other bonds, such as performance bonds, that are necessary to carry out the project. The bid bond guarantees the price and performance terms that the contractor quotes the client. When the client requires a bid bond, the contractor must provide a bond, usually at a percentage of the bid price. The client gets to keep the bid bond if the contractor decides not to perform the contract, or violates other contract terms.
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Significance
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Government agencies and corporations often require bid bonds on large projects. A complex bid requires a lot of time and money to analyze, and the organization may be legally required to go through the entire formal bidding process again if a contractor decides not to work on the project. If the organization hires multiple contractors, one contractor's decision to cancel a bid may delay the entire project, leading to even higher costs.
Time Frame
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A contractor must obtain the bid bond before he bids on the project. Each contractor gives the bid bond to the client when he bids on the project. The client holds the bid bonds while it considers all of the bids on the project, and then returns the bid bonds to the contractors when it selects the winning bidder.
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Multiple Projects
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A contractor may perform multiple jobs for a client which require bid bonds. According to the General Services Administration, the contractor can provide an annual bid bond, which guarantees all of the quotes on projects that the contractor bids for throughout the year.
Considerations
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The contractor can deposit cash or a check with the client instead of a bid bond, but a bid bond is more convenient because even a small percentage of the value of a major construction project can be a large amount of cash. The contractor purchases a bid bond from a surety, which receives cash payments from the contractor for providing the bond. Both the contractor and surety are liable to the client for the value of the bond, but the surety can collect the bond price from the contractor if the contractor cancels the bid.
Bid Cancellation
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It may be worthwhile to cancel a bid, even if the contractor loses the bond money. For example, the client may require a bid bond of $500,000. If the prices of materials and labor increase, so the contractor would have to spend $1 million more to complete the project, he can cancel the bid. The contractor loses the $500,000, but he can submit another bid that includes the $1 million in added costs.
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