A big similarity between bid bonds and performance bonds are that both frequently apply to construction projects. They also both protect another party in case the job is not finished.
Despite their similarities, however, these bonds are not the same. A performance bond guarantees that a project will be finished even if the contractor fails to meet the obligations listed in their contract. Meanwhile, a bid bond is specifically for a project that is bid on and won. A bid bond guarantees that the contractor who won the bid will start and complete the project as specified by the contract at bid. Performance bonds do not require bidding to be involved, as they can be used when a contractor enters any contract with a client.
Are Bid Bonds Required?
Some clients will require winning contractors to enter into a bid bond in order to guarantee a complete job based on the original contract. Even if a bid bond is not required, entering one can help the contractor’s chances of being chosen for certain projects. This guarantees both that the job will be complete and that the contractor will not violate the boundaries and requirements of the original contract. Federal projects legally require bid bonds for all contractors who bid.
How Does a Bid Bond Work?
Like most other bonds, bid bonds have three main parts: the surety, the obligee and the principal. The principal in this case is the contractor, who purchases a bid bond from the surety. The obligee is the project owner seeking a contractor. The principal typically pays a lump sum for the bond from the surety, which dictates they will complete the job under the understanding of the original contract. This prevents them from giving a low price simply to be hired, and then raising their price after the contract is signed. If the contractor tries to do so, the obligee may break the contract and find another contractor for their project. In turn, the surety will pay the difference between the original quote and what the obligee will pay for another contractor, since the original contract was broken.
This way, the obligee will not lose money for the contractor violating the contract. After a bid bond, a performance bond will typically be required to ensure the job is complete. While a bid bond ensures the contract bid upon will be honored, a performance bond will ensure that the work will be completed. In a performance bond, the surety will pay for the cost of replacing the contractor that cannot complete the project. The surety can then seek compensation for those expenses from the original contractors. So even if a contractor enters a surety bond, that does not excuse them from repercussions if they cannot follow the contract or complete the project as promised. Bonds are specifically tailored to protect the obligee in situations regarding broken construction contracts.
Are Bid Bonds Expensive?
Bid bond prices vary. Depending on the location, cost of the project and the contractor’s history, a bid bond can range anywhere from $100 to 10% of the cost of the project. This could be a few hundred or thousands of dollars, depending on the contract. Then again, more expensive projects generally mean higher profit. This is why many firms and companies now require bid bonds, as it helps deter fraudulent bids and under-bidders. The price for a performance bond is based on the cost of the project, and the percentage of the cost that the contractor pays is determined by the surety.
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