CONTRACT BONDS

PERFORMANCE AND PAYMENTS BONDS

Bond Penalty: Based on Contract Total 

A bid bond is a contract surety bond that serves a specific purpose. Contracts that are negotiated between a project or job owner and a contractor generally to not require submission of a bid bond. Competitively bid projects, i.e., projects that are "let" to the public or to a pool of preapproved contractors often do. The bid bond guarantees two specific obligations.

• The contractor has diligently prepared his or her estimates and is submitting an offer in good faith. The surety bond guarantees that if awarded the contract that he or she WILL sign the final agreement at the price and in compliance with the specifications of the project.
• The surety issuing the bid bond will provide the appropriate performance and/or payment bond(s) if the contractor wins the bid.

On a practical note, requiring a bid bond relieves the project owner from being obligated to background and qualify a particular contractor. That prequalification ("due diligence") is work delegated to the risk underwriting specialists of a surety company with vast experience and resources to choose whom may be properly qualified. The surety bond allows the project owner to file a claim for damages against the surety company. The bid bond may be written with indemnity language, allowing claims for only real damages, or forfeiture language which allows a claim for the full penal sum of the surety bond in the event of contractor default.

A bid bond amount is often left "open" until the contractor submits his or her final response to a request for proposal from a project owner. It is rare for a project owner to fix a specific bond amount (bond penalty) because bids often vary during the response period based on changes in work as well as changes in the contractor's estimates. It is easier and general practice to require a bid bond in an amount that represents a percentage of the final bid amount. Bid bond penalties are generally five to ten percent (5% to 10%) of the bid.