An Overview of Bid Bonds and Why They are Essential to Contractors
As a contractor, you must constantly bid for various projects to earn a steady living. Successful bids and project completions can help you scale your business quickly and establish yourself as an industry leader. In time, you will learn how to bid for which project, enabling you to stay ahead of the competitors in an ever-changing marketplace.
However, a significant thing many new contractors forget is acquiring a bid bond, a specific contract many project owners may require at the time of tender. Knowing the ins and outs of this agreement is essential, as the absence of it could cost you lucrative deals.
The following information highlights the key things you should know about these contracts.
About the bonds
In simplest terms, these are financial guarantees contractors provide to project owners if they fail to deliver or back out of the project for which they bid and won. A surety insurance company provides the bond, fulfilling it when the owner claims it if contractors back out of the project.
For example, suppose a contractor has bid on a project and won but cannot fulfill the responsibilities for various reasons (lack of funds, equipment etc.). In that case, the project owner can claim the bond to avoid the cost of a re-tender. They can claim the entirety of the contract or settle for the difference between the initial (or first) and the second bids (typically higher than the first).
Factors that affect the bond value
The cost of a bond can vary based on many factors, such as size and type of project. Generally, it is around ten percent of the contract value. For example, if the project costs $250,0000, the bond value will be $25,000.
The project’s location can also determine the value, depending on whether additional expenses will be associated with obtaining bids from local companies. Also, note that federal projects may require higher value bonds, averaging between five to twenty percent.
Why they matter
Bonds can help contractors get more work, while the lack of them can cost them projects. For instance, if you are a small business, you might not be able to bid for major projects even if you qualify because you are unbonded.
A contract can help project owners know you are a legitimate company capable of fulfilling the responsibilities you undertake when bidding for a project. That’s because they know that a surety company would only authorize a bond if the contractor were fit to carry out the project tasks and duties.
Why you should use an independent broker
As mentioned earlier, a contractor without a bid bond would rarely be considered for big projects. However, knowing where and how to secure these contracts can be challenging for companies and subcontractors who have never done it before. Invariably, using the services of a reputable and experienced insurance brokerage firm can help immensely.
These firms have unmatched industry experience and insider knowledge of how surety companies work. It enables them to find the right provider for your specific bond requirements, ensuring you have a legitimate contract when bidding for the projects you desire to work on. Before hiring their services, you can browse their site for client testimonials to know how reliable they are.
Many will also offer free consultations to explain the process and what you should expect. Finally, reputable insurance brokerage firms can help with multiple needs, such as government, developer, and construction bonds.