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Four Myths About Bid Bonds And The Truth Behind Them

A bid bond is a surety bond that you may be required to obtain before bidding on certain projects. If you've never bid on a project that required a bid bond, you may be wondering how they work. While talking to friends or other contractors, you may have heard some myths about these bonds. Here's a look at some bid bond myths and the truths behind them.

1. Myth: Bid bonds only protect the project owner.

Like many myths, this one is party based on reality. Bid bonds do protect the project owner. If the project owner selects a contractor for the job but the contractor is not able to do the work, the bid bond covers the project owner's losses. In most cases, the bond covers the difference between the lowest bid and the next bid, but some bonds may be structured differently. For instance, the bond may be used to cover delays related to finding a new contractor.

However, bid bonds also help the contractor. In short, a bid bond acts as reassurance to the property owner that anyone who bids can handle the job. As a result, the project manager can look at each of the bids individually, and he or she can't automatically screen out contractors that he or she doesn't know. Basically, bid bonds help create parity in the process. These bonds also prevent unscrupulous contractors from submitting fraudulent bids, which reduces the amount of potential candidates in the field, hopefully drawing more attention to your bid.

2. Myth: Bid bonds are expensive.

The cost of a bid bond varies based on the size and scope of the bid. Project managers may require bid bonds for a certain dollar amount or for a certain percentage of each bid. However, you don't pay that amount upfront. Rather, you pay the premium, and this amount can also vary.

In some case, the insurers may set the premium based on your perceived ability to take up the contract. For instance, if a bond issuer knows that you don't have the staff or equipment to take advantage of the bid, it may assess high rates on your bond. However, in light of the benefits they provide, bid bonds are not particularly expensive.

3. Myth: The issuer pays defaulted bonds.

Bid bonds, like most surety bonds for contractors, are initially paid by the bond issuer. However, the contractor is then held responsible for the payment. To explain the process, imagine you put in a bid and were chosen for a job. However, due to unforeseen circumstances, you couldn't take the job. The project manager puts a claim on your bid bond, and the bond issuer pays the claim. At that point, the bond issuer than demands the funds from you.

4. Myth: You can only get bid bonds from surety companies.

Some project managers may only accept bid bonds from surety companies, and these project managers may also require you to obtain other contractor bonds throughout the project. However, some projects, such as federal projects, allow you to put up individual sureties. This is when you use personal assets in place of a bond, but those assets fill the same purpose as a bid bond. Essentially, if you get the bid but don't do the work, you forfeit some of your assets to the project manager. There are usually strict rules on which types of assets you are allowed to use as an individual surety, but in most cases, the assets need to be relatively liquid. In that vein, for instance, stocks trump jewelry.

To learn more about bid bonds and other types of contractor bonds, contact a surety company today.