Although they have the word “bond” attached to them, the fact of the matter about bid bonds is that they are NOT investment instruments. They are surety bonds that practically forces contractors to complete projects according to the terms of the contract set by the project owners. But how do they work exactly? Read below to know.
Whenever there is a new construction project in the works, the project owners will make an announcement soliciting bids from the different construction companies. These construction companies then post their respective bids. Not all of these bids are created equal, though, and only those that have bid bonds attached to them are taken seriously.
Whether a project is by a government agency or a private company, the winning bid will always have a surety bond attached to it. This is hardly surprising considering that the Miller Act requires all public works projects over $100,000 to be secured by a surety bond. It is actually not required for small projects, however, the construction industry has gone on to make surety bonds a standard issue in bidding.
A surety bond ensures that the winning contractor completes a project based on the specifications indicated in the project contract. If the contractor fails to complete the project, or does not meet certain requirements in the contract, the project owner can make a claim. But how much does a bid bond cost?
For small projects, it could be anywhere from $100 to $250 while bigger projects cost one to three percent of the total cost. How much a contractor actually pays in bid bond really depends on their financial standing. Just like insurance companies, surety bond companies take a look at the health of their clients (in this case, financial health), and it’s practically automatic for them to check into a company’s finances and credit rating before agreeing to a surety bond.
Obviously, if a construction company has no financial history because it is very new or its finances are not sterling, the more it will need to pay in surety bond. But this is actually good news for those that are wanting in their finances. Just because they have a negative on their balance sheet, it does not mean that they cannot bid on construction projects that will bring money in.
Because there are surety bond companies noted on www.comparmaroc.com that cater specifically to companies with bad credit rating or no credit rating at all, anyone in the construction industry can bid on projects. Of course, there is a caveat, and it is big BUT. Surety bond companies, like insurance companies, charge clients more if they are deemed financially risky. But then again, as it is right now, the standard industry rate is at 1 to 3%, so it really is not much of a financial burden even for companies standing on shaky financial ground.
If your company belongs to this category, make sure to get a quote from at least three surety bond companies.