What Are Bid Bonds In Construction?

Taking on bigger and more complicated projects is great for your business. However, constructing commercial buildings or public facilities costs millions of dollars and involves major stakeholders. 

Imagine this: a project proposal that has the potential to reshape skylines and communities. The excitement is palpable, but so are the uncertainties. Will the selected contractor uphold their commitment? Can they execute the project as promised? How can project owners ensure that the bidding process yields dependable results?

Enter bid bonds—a tried-and-true mechanism designed to instill confidence, foster accountability, and ensure the integrity of the construction bidding process.

At KASE Insurance, we’ve witnessed firsthand how bid bonds serve as a linchpin of trust in construction ventures. As we delve into the nuances of bid bonds, we’ll not only uncover their purpose, but also shine a light on their critical role in safeguarding the interests of all parties involved.

Let’s get started!

Contents:
→ What Are Bid Bonds?
→ How Does a Bid Bond Work?
     → How Is a Bid Bond Different From Other Bonds?
     → The Cost of Bid Bonds
→ The Significance of Bid Bonds in Construction
→ The Benefits of Bid Bonds
→ How to Qualify and Apply for Bid Bonds
→ Examples of Bid Bonds in Construction
→ Work with a Reputable Bid Bond Provider

What Are Bid Bonds?

A bid bond is a type of surety bond commonly used in the construction industry when contractors are bidding on a project. It is a financial guarantee provided by a contractor (the bidder) to the project owner (typically a government agency or private entity) as part of their bid submission to work the job. 

Bid bonds serve an important purpose: they assure the project owner that when the contractor is awarded the contract, they will provide the required performance and payment bonds as specified in the bidding documents. It mitigates the risk of a project being awarded to a contractor who will then back out. 

How Does a Bid Bond Work?

Most construction projects that involve public infrastructure or government agencies require contractors to secure their proposals with bid bonds. Without one, obligees have no way of ensuring the contractor will fulfill their obligations.

Bid bonds function as a three-party agreement between:

• An obligee requiring the bond before awarding a contract to a contractor;
• A principal obligated to fulfill the terms of the contract; and
• The surety provider who provides a guarantee to the obligee that the principal will satisfy the terms of the contract.

Securing your proposal with a bid bond proves you can obtain other necessary bond requirements—such as a payment bond or performance bond—and demonstrates you’re qualified to work.

Bonded contractors often go through a lengthy and thorough process of background checks before being awarded a bid bond. Obtaining one shows your client you have the necessary expertise and financial capacity to take on the job. 

How Is A Bid Bond Different From Other Bonds?

Just like a bid bond, performance bonds also involve three parties: the obligee, the principal, and the surety. Similarly, if a contractor’s work is deemed defective or of poor quality, the project owner can also file a claim against the performance bond. 

However, the two differ in purpose. 

A performance bond covers financial damages incurred if the principal fails to finish the job or complete tasks per the project’s terms and conditions. Meanwhile, bid bonds only cover the bid itself to ensure the contractor selected can take on the project.

A bid bond also covers a percentage of the bid amount, while a performance bond covers the amount of the entire contract. 

Bid bonds are also different from payment bonds, which are issued by contractors to their subcontractors, labourers, and suppliers to guarantee their payment. These ensure that those working on the project are paid, whereas a bid bond guarantees the project issuer that the job they have assigned will be completed. 

Are Bid Bonds a Type of Insurance?

While they serve a similar purpose, they are not insurance. Beyond the structure of the three-party agreement, another clear delineation between the two comes down to the stricter approval process. 

In many cases, insurance is a basic right—such as auto insurance—that cannot be denied. What changes based on the applicant is their premium, which is the amount of money they are billed for their coverage. These payments are not refunded, either. 

Bid bonds can be denied. Surety companies are under no obligation to provide bid bonds to applicants they deem unsuitable for credit risk reasons. In some sense, a bid bond is more of a privilege that builds your credibility and opens doors.

What Do Bid Bonds Cost?

Contractors typically obtain one from their surety provider for the bid stated in the project’s terms. Typically, this is anywhere between 5% and 10%. For instance, the contractor must secure a bond for $50,000 on a project requiring a $500,000 bid. 

Are Bid Bonds Refundable?

Yes! Once a project is completed according to the terms, the bid bond is returned.

The Significance of Bid Bonds

Bid bonds ensure a fair and competitive bidding process while protecting the interests of project owners. They help deter unqualified or unserious bidders from participating in the process while also providing a level of security for project owners against the risk of non-performance by the winning bidder.

From the perspective of potential bidders, these bonds ensure they are not losing construction jobs to contractors who are unable to work them. This means that more jobs are going to contractors who deserve them and can complete them properly. 

Benefits of Bid Bonds

While the benefits for project issuers may be more obvious, the benefits of bid bonds on contractors cannot be overlooked, either. 

As we mentioned, bid bonds ensure that jobs are being awarded to contractors with the means and wherewithal to complete the project. As such, this leads to higher completion rates and a level of quality assurance that would be otherwise unattainable. 

It also ensures that managers accepting projects have the financial means to get the job done, which assures all subcontractors on the job that they will be paid. This makes for a healthier construction industry where everyone fulfills their responsibilities. 

How To Apply For Bid Bonds

Bid bond applications are typically made through a reputable surety provider.

To start, contractors should gather their required documentation—such as relevant financial statements, credit history, references, and so on—then complete an application, typically by filling out the form issued by their chosen surety company. 

The surety company will then review financial statements and complete its underwriting process, which involves assessing the risk of issuing you the bond. This will take your previous job history, the job itself, and financial strength into account. 

Once this underwriting process has been completed, the surety company will decide whether or not to approve or deny your bond application. If approved, you can expect to pay a premium to the surety company as payment for providing you with the bond.

For more information about the qualification and application process for bid bonds, please visit our Guide to Surety Bonds in Canada.

Examples of Bid Bonds in Construction

Bid Bond In Action: Example #1

You run a contracting company that builds schools. Your municipal government is looking to have one built in a nearby community, so you decide to bid on the job. 

By acquiring a bid bond from a surety company, you get a leg up on your local competitors and ultimately win the rights to work on this project. The local government officials feel confident your crew can handle the work, and you make valuable connections by gaining the right to work on a well-paying project that gives back to your community. 

Bid Bond In Action: Example #2

Several construction companies have been eagerly awaiting the announcement of a new project: the building of a thirty-floor condominium in the heart of downtown. 

Knowing this is certain to be a career-changing project, you do the preliminary work to secure a bid bond from a reputable surety company. In doing so, you win the project bid over your competitors willing to offer more money. The private firm issuing the job felt more confident knowing your financial records had already been vetted. 

Grow Your Construction Business with KASE Insurance

It’s important to foster strong working relationships in your industry. Earn the trust of your clients and those you work with by securing a bid bond that mitigates financial risks, proving you are someone willing to bet on your skills and capabilities. 

KASE Insurance is one of the top providers of bid bonds in Ontario. We specialize in personalized solutions for all of our clients. Whether you’re an independent contractor or a large construction business, we are ready and waiting to provide you with the bond you need, free of unnecessary riders.

Get in touch with us today to learn more about bid bonds in construction!