Bid Bonds And Construction: What You Need To Know

23 January 2018
 Categories: Finance & Money, Blog

If you are preparing to place a bid for a construction project, you need to be prepared to post a bid bond. A bid bond is a surety bond that will provide protection to the owner of the project. The following are some things you should understand about bid bonds and why they are important in the scope of the construction industry:

Bid Bonds Defined

A bid bond is a surety bond. A surety bond is an agreement between three parties involved with the project. In the case of a construction project, the three parties include the contractor, the owner of the project, and the bond company that stands behind the agreement. A bid bond will ensure that a contractor will keep his or her end of the agreement to take the job once the bid is won. A project owner could face a plethora of problems if contractors bid on job only to back out at his or her leisure. A bid bond also puts into writing the amount the contractor will do the job for and not increase that amount later.

How Bid Bonds Provide Protection

With a bid bond, there is a total amount for which the contractor can be held responsible for if he or she violates the agreement between all parties. For instance, the contractor would be in violation of the agreement if he or she holds the project hostage for more money.

In the event of a violation, the owner of the project can file a claim against the bond. The contractor and the bond company will have to pay if the violation is deemed valid. The contractor will then have to pay the bond company the amount they had to put forward as per the agreement.

Avoiding Bond Claims

Bond claims essentially occur when a contractor submits false bonds, which is done for a variety of reasons. It is not a good practice and can have severe ramifications. A bond claim can have severe impacts on a contractor. Not only will it cost additional money, but they can sour the reputation of a contractor. For an industry that does a lot of business through word-of-mouth advertising, this can be incredibly disadvantageous.

The best way to avoid bid claims is to not place bids in amounts that are more than the estimated project. It is not uncommon to make an error from time to time when doing bid calculations, especially when based on outside information. If the indiscretion is not your fault and you provide proof, you can avoid a claim. To ensure that you don't make any mistakes, be sure to use a reputable estimation software to help reduce any potential problems.