What is a Bid Bond
A bid bond is, at its very core, a very simplistic and easy thing to understand. However, like many of things that seem very easy at first, they can become rather complicated once all the differences are known. We’ll try and dispel all the myths surrounding bid bonding and help you in understanding the basics and the pitfalls that can occur in the bidding process.
Definition: A bid bond is a document that provides assurance to the owner of a project that the bidder is ready, willing and able to perform the job according to the bid specifications if they are awarded the contract.
It seems so easy – how can this get complicated?
Well, first let’s start with the basics around the bid bond process. Given that the bond itself requires performance if the contract is awarded, then the underwriting process for it is the same as if the bond were being written for the final contract. Thus, the entire underwriting requirements have to be satisfied. This includes all the basics, such as good financials, ability to complete the job, good credit, good personal history of performance, etc.
Well, the other thing that is difficult is that the contract hasn’t been awarded yet. In nearly every situation, the final contract is slightly different from the bid specifications. Thus, there is an additional amount of risk as the full job specifications are not known at the time of the bid.
Another difficult situation is that the timing is only a guestimate. This guess could have serious ramifications. For example, a job that was slated to start in February (during the down time of most contractors) would be much, much different than a job slated to start in July (the busy time of the year). This additional risk to a job given the time ambiguity creates risk.
Finally, the last risk is that of financial desperation. For example, that same February job would be bid at a different rate than the same job in July. There is an additional risk in the bidding process as these are typically offered to the lowest bidder. Thus, there is pressure to decrease rates to get work. The decrease in rates just to get work (especially during the slow times of the year) can eliminate any buffer that is needed for most bond companies to sustain the necessary cash if a difficulty were to arise with the job.
A bid bond is, at its very basics, an easy thing to understand. It is a guarantee by one party, for the benefit of another, to a third party that the bidder of a contract will perform according to the terms of that contract if they are awarded the work. However, like many simple things, these can get complicated. The things that complicate bid work include the downward pressure on prices, timing issues which would affect the work being done, as well as the inherent changes that arise in most contract situations. All of these things can change the original assumptions that can arise during the bid bond process. One company that is leading the pack and you can trust is Swiftbonds.