Construction Bond Claims - Part 1
Contractors always work to avoid claims situations, but should also be proactive about understanding the process. There are 3 main types of construction bonds: bid bonds, payment bonds, and performance bonds. Contractors should be familiar with the claims that can arise from each. This week, we take a look at Bid Bonds.
First, what is a bid bond? A bid bond is issued as part of a supply bidding process by the contractor to the project owner, to provide guarantee, that the winning bidder will undertake the contract under the terms at which they bid.
The cash deposit is subject to full or partial forfeiture if the winning contractor fails to either execute the contract or provide the required performance and/or payment bonds. The bid bond assures and guarantees that should the bidder be successful, the bidder will execute the contract and provide the required surety bonds.
A bid bond claim arises when the contractor, also known as the "supplier" or "principal," is the successful bidder but fails to enter into the contract and provide final bonds.
Generally, the principal and surety are bound to pay a stated sum (for example, 5-10% of the contract price) to the owner (or general contractor), also known as the"obligee". The principal and surety should make sure the bond form caps liability at a defined amout --- typically the difference between the principal's bid and the bid of the next highest bidder, not to exceed the penal sum of the bid bond.
Contractors prefer the use of bid bonds because they are a less expensive option and they do not tie up cash or bank credit lines during the bidding process. Owners and general contractors also use bid bonds because they establish and confirm that the bidding contractor or supplier is qualified to undertake the project.
Leveraging one's relationship with the right surety gives a contractor the knowledge and experience of their claims team. Knowing the basics is the first step for any contractor who wants to take on bonded jobs.