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Bid Bonds - What Are They And Why Are They Used?

When contractors seek public works projects, they normally encounter a requirement for bid security to accompany their proposal. There are a number of ways to satisfy the requirement but the easiest method is with a Bid Bond. Bid bonds are issued by Bonding Companies, aka Sureties.

Bid Bonds accompany contractor's proposals and protect the interest of the obligee (the party who receives the bid). They guarantee that one of two things will happen.

1. If the contractor receives the award of the contract, he will provide the required bonds and insurance, sign the contract and commence with the project.

2. In the alternative, it guarantees the contractor will pay the difference between his bid and that of the next higher bidder.

In the second scenario, if the contractor fails to pay the difference, the surety becomes responsible and must pay the obligee (up to a dollar value not in excess of the bid bond amount). Bid bonds assure that contractors will stand by their proposals. They provide a guarantee of the contractor's financial integrity.

This process assures that contracts offered by public bodies such as towns, states and the federal government are always performed for "the lowest price bid" - which is beneficial for the taxpayers who fund the work.

Contractors submit comprehensive information on their companies and themselves personally, in order to gain the support of a Bonding Company. The Surety will only provide a Bid Bond if they are willing/able to provide the Performance & Payment Bond that arises when the contract is awarded.

If a Bid Bond claim occurs, the bonding company will sue the contractor for financial recovery. This is typical in a surety relationship and is one reason bonds are not insurance.

Steve Golia is Bond Manager of The Surety Source, a construction bonding specialist that writes bonds in every state. The firm is 100% paperless and provides 24 x 7 service! You may copy this article in your website if this paragraph is included.