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Bid security is a risk insurance used in construction, where contractors submit a bid bond with their bid to guarantee they will sign a contract if awarded. This protects the owner from frivolous bidding and ensures all bidders have been vetted. It is not the only binding instrument used, as pay and performance bonds are also required. The Miller Act defines bond requirements on US government projects.
Bid security is a form of risk insurance used in the construction industry. By submitting a bid bond along with a construction bid, a contractor provides a legal guarantee that they will sign a contract if awarded. If a related contractor does not sign the contract when offered, he faces both financial and civil penalties.
These bonds are designed to protect the owner or developer of a project. An owner can be a developer, a private company, or a government agency. Bid security helps minimize frivolous bidding and wasted time for the owner. Because the bonds are issued by private bail bonding companies, the homeowner can feel confident that all bidders have been thoroughly vetted and pre-qualified by their respective bail bond agents. This helps weed out bidders with a track record of poor performance, as well as those who lack the funds to complete the project successfully.
When a job is issued for bids, the owner will specify if bid bonds are required. Bid security typically represents a percentage of the total bid and will vary widely based on project requirements. Contractors will request bid bonds in this amount from their liaison agents, who will issue a bond directly to the contractor. The contractor will submit both his bid and the bid bond to the project owner.
All bidders who do not receive the project will receive their bonuses once the bidding process is complete. The contractor who wins the job will also receive his bond once he signs a contract for the job. In effect, the contract now takes the place of the offer bond to protect the owner from risk. If the contractor decides not to sign the contract, the surety company will reimburse the owner for the losses suffered. This is usually equal to the difference in price between the lowest bidder and the bidder who ultimately receives the job.
In the United States, security of supply is required on all government projects valued at more than $100,000 United States Dollars (USD). The bond must be valued at twenty percent of the offer price up to a maximum of $3 million. Because it can sometimes be difficult for smaller contractors to obtain such large bonuses, they are allowed to offer bid guarantees in the form of cash or cashier’s checks. Bond requirements on US government projects are defined in the Miller Act, which was first passed nearly a century ago. Many states have their own tying laws known as the “Little Miller Acts.”
It is important to understand that bid security is not the only type of binding instrument used in most projects. An owner who requires contractors to provide a bid bond will usually also require pay and performance bonds. Once the contract is signed, a payment bond protects the owner if the contractor does not pay its suppliers and subcontractors. A performance bond is more comprehensive and protects the owner if the contractor does not complete the job due to poor performance, financial problems or bankruptcy.
Smart Asset.
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