The ABC of Bid Bonds

You will find there are only three fundamental forms of building bonds:

  • Bid bonds
  • Performance bonds
  • Payment bonds

Surety Bond Basics

Various state-mandated regulations summarize a requirement for different types of bond protection with respect to those included and the particular job. Hence, surety bond bureaus issue several building bonds that are distinct for big jobs that call for in-depth work and contracts that are provisional. As with other surety bonds, guaranteeing a bid bond involves three parties:

1.The contractor seeks the fiscal protection of a bond.

2.The bureau that issues the bond is backed by surety.

3.The contractor is backed by assets.

How Bid Bonds Work

The main reason for a bid bond will be to ensure the contractor the low-bidding contractor will enter into a contract for the cost quoted in his bid. This keeps the contractor from raising the bid on the job. Bid bonds watch over the project manager and additionally stipulate that the contractor will ensure other needed functionality and payment bonds needed through the entire endeavor, as to further ensure his work. In the event the contract breaks the agreement, usually the bond permits the contractor to collect damages in the sum of how much more he must pay to contract the next-lowest bidder for the job. In case the contractor cannot cover the price, the surety is going to be held responsible for paying up reparation to the bond’s total face value. As regulations in the bonding business are continuously evolving, court rulings vary. 


Most bonding regulations expect a contractor to supply between 5% and 10% of the bid upfront as a penal amount. Nevertheless, federally-financed jobs typically need the penal amount to be 20% of the bid. By way of example, in case a contractor offers $100,000 to finish a building job, the firm will need to supply a $5,000 to $10,000 (or $20,000 for a federally-financed job) bond along with the bid.

This cost is figured to guard the contractor if the low-bid contractor opt from the contract, forcing the contractor to pay more to contract the second-lowest bidder for the job. In Illinois the 10% standard is used by the Capital Development Board when doling out grants for public building jobs. Jobs FAR– or managed by the Federal Acquisitions Regulations– need 20% of the total bid to be contained in the bond.

Bid Bonds In The Construction Industry

Contractors pay a premium to ensure a bid bond to surety bureaus. Bid bond prices fluctuate significantly because of amount of variables, such as contract provisions, the bid sum, as well as the authority at which contract is executed. Usually bid bond premiums are between 1% and 5% of the penal amount. Check to see whether a bid bond in the construction industry is needed, and in that case, what the approximate penal amount will be before you begin preparing a bid. This will allow you to establish the fee you are going to pay to guarantee the bid bond.

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