In a competitive environment, the tender process can be time consuming and costly for both owners and contractors alike. When a contractor submits a price, it’s important that the owner can rely on a contract being formed once he accepts that bid. Imagine an environment where contractors were frequently walking away from their bids if they realized there was a large bid spread or simply changed their minds. It would create inefficiencies and frustration for the owners. Sure the owners could sue for damages, but litigation is time consuming, expensive and there’s no guarantee. The answer to this dilemma is the 10% bid bond and if a contractor provides one with his tender and does not honour his bid, the owner can claim up to 10% of the bid price for any damages they suffer.
What is a bid bond?
A Bid Bond, is a type of bond that accompanies a contractor’s tender submission. Its value is normally 10% of the tender amount and among other things it guarantees that the bid was submitted in good faith. It accomplishes this by allowing the owner to claim up to 10% of the tender price if the contractor does not follow through with the contract upon award. This 10% claim is meant to cover the difference between the low bid and the second lowest bid. The requirements for a bid bond are usually found in the “bid security” section of the tender.
In order to issue a bid bond, a contractor must qualify for a bond facility. The qualification process is done through comprehensive underwriting by the bond company focusing on the contractor’s operations and financial position. A contractor’s ability to submit a bid bond shows that a bond company has verified the contractor’s credit and believes in their ability to complete the work. This prequalification is a valuable service that owners rely on to ensure only those qualified are tendering. The idea of an owner underwriting each bidder would be costly, breaches privacy and is unrealistic.
Is a bid bond always 10%?
Typically a bid bond is 10% of the contract price, but that isn’t mandatory. Some owners will ask for 5%, a fixed dollar amount or any amount they think is worthy. The idea behind the bid bond is that the owner can recover the difference between low and second lowest bidder, and it provides a prequalification function. Standard practice and CCDC documents call for 10%.
Do I have an alternative to a bid bond?
Most owners specify the requirement for bid security of 10% of the contract price in the form of a bid bond, irrevocable letter of credit or certified cheque. This means that even if you don’t have a bond facility, you can provide another type of security and still qualify your bid. The problem with that method comes down to its effect on your cash flow. Other forms of security tie up cash and providing cash backed security for multiple bids could put your company in a cash crunch.
What constitutes a claim under a bid bond?
A project owner can make a claim if the selected contractor fails to enter into a contract upon award. This could be due to a change of heart or the inability to provide proper insurance, performance bonds, or other required documents.
The Claims Process
When a demand is made by the project owner under a Bid Bond, the surety will begin an investigation surrounding the circumstances of the claim. In an effort to establish if the claim is valid, the surety will focus on answering the following questions:
- Is the contractor or “principal” in default of their obligations created during the bidding process?
- If liable, how and to what amount should the surety compensate the project owner?
Should the surety find sufficient evidence surrounding the claim, they will then compensate the project owner for the resulting loss. Typically, the amount of the loss is the lesser of the value of the bond or the difference between the defaulting party and the next lowest compliant bid.
What if a claim is paid? Am I liable?
It is never the bond company’s intention to pay claims. Their function is to provide the guarantee and they charge a premium for that service. If the bond company pays a claim on your behalf they will look to be reimbursed by way of the indemnity agreement. This is the security document you sign when you establish your bond facility.
Do you need a Bid Bond for an upcoming tender?
Our dedicated team of surety experts are ready to assist you in obtaining the surety bonds you require. We look forward to discussing your situation and helping you get bonded.