Bid bonds are very important to both project managers and contractors in the construction business. A contractor who purchases a bond bid can show any project owner that he/she has the wherewithal to complete a project as specified by the owner or manager, and in the time frame needed. It serves as a kind of guarantee to the job owner that you as a contractor are stable in your business operations, and that you have the financing and all the necessary resources to undertake the kind of project specified in the contract.
Since the bid bond allows a project manager to collect compensation in the event of unsatisfactory performance or failure to complete the project, there is a much higher degree of confidence that a project manager can have when using a bonded contractor. In effect, a bid bond ensures that regardless of what happens on any given project, that the construction manager or owner will not suffer financial losses as a result of anything done or not done by a contractor.
How Bid Bonds Work
From the standpoint of a venture owner, requiring contractors to obtain a bid bond will automatically ensure that there will be no ill-considered bids submitted, since any contractor would have to live up to the terms of the bond, or pay the penalties when he/she defaults on those terms. Surety companies which sell bonds to principals, are always very careful in screening the requests or applications for bonds, because the surety company can be held liable in the event of a claim.
For that reason, it’s standard procedure to conduct thorough financial assessments, as well as a credit history check on any contractor business applying for a bid bond. When the bidding process is underway between several contractors, each one will estimate the total cost for a project, which represents a dollar figure they are willing to undertake the job for. This takes into account the contractor’s own expenses and the employees which have to be paid while working on the construction gig, as well as for the contractor’s own time and involvement. Each contractor will then submit this total dollar figure estimate to a project owner and wait for the selection process to conclude.
The surety company issuing bid bonds to contractors will generally compensate the overseer owner an amount equal to the difference between the two lowest bids. In the event of a claim for noncompliance or incomplete work, the surety company has the option to sue the principal, with the expectation of recovering costs incurred to pay off the claim registered by the project owner. The likelihood of this occurring will depend entirely on language written into the bond itself.
When the Construction Bond Obligation is not Met
When the obligations specified in a bid bond are not fulfilled by the contractor, both the contractor (who will be specified as the principal in the bond language), and the surety (the company which sells the bond to the principal), are liable for the amount of money being claimed by the project owner. The amount of money being claimed by the job overseer will include all costs related to the failure of the project itself, as well as the costs for securing a replacement contractor to complete or rework the gig.
Generally speaking, the amount which is penalized comes to between 10% and 20% of the amount originally bid by the construction pros. This of course, will always work out to be a very large sum of money, and it serves to be a strong deterrent against noncompliance and incomplete work on the part of the principal. This being the case,, it serves as another kind of guarantee to the plan owner that the contractor will do everything possible to fulfill the terms of the bond.
What’s the Miller Act All About?
The Miller Act passed by Congress in 1935 is legislation which is closely related to the area of bid bonds, and contractors performing work for project owners. In this case however, the construction job owner is the federal government, and all contracts being bid on are for federal construction projects. Under the provisions of the Miller Act, every contractor who bids on one of these federal projects is required to post a payment bond which covers all labor and materials, as well as a performance bond, whenever the value of the project exceeds $100,000.
The requirements of Miller Act from the standpoint of the contractor are the following:
- the contractor must purchase a performance bond which provides a measure of protection for the federal government
- the contractor must purchase a payment bond which covers suppliers, tutorials, and labor. This payment bond is generally required to be an amount equal to the total value of a project itself, and not less than the amount of the performance bond
- all subcontractors involved in the job are to be covered under the terms of the payment bond, as well as all suppliers who provide materials for the project
- all second-tier suppliers will also be covered under the payment bond, and the second-tier suppliers are those which would be hired by subcontractors.
If You Aren’t Properly Bonded
As a contractor, if you are not properly bonded, in terms of bid bonds, performance bonds, and payment bonds, you would not even be considered in the bidding process for any federal construction projects, because as stated above, these are legal requirements under the Miller Act. In the case of private-sector projects, there may not be legal requirements involved with bidding on contracts, but there are certainly some very powerful consequences at work all the same.
For instance, if you fail to purchase the requisite bonds that will make a job owner comfortable with considering your bid, it is very likely that you will lose out in the bidding process to competitors who have purchased the requisite bonds. This is especially true as the dollar value of any construction project rises, because the potential for a job owner to suffer losses on a job would rise along with overall project cost. That will make the contract owner extremely reluctant to risk awarding the contract to any principal who fails to provide the kind of protection that would prevent the job owner from suffering financial losses.
If you need a bond, there is no better ally than NFP Surety. We can take care of your needs regardless of state and credit statue. and have access to top-rated carriers. We can also help with any other surety type, both contract or license.
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