It’s essential to understand the ins and outs of bid bonds as a construction contractor. So, we’ll walk you through the following:

• The definition of bid bonds
• How do bid bonds work?
• Who needs a bid bond?
• Why do I need a bid bond?
• How do I qualify my company for bid bonds?
• The application process
• The cost for bid bonds
• Do bid bonds expire?
• The renewal process

 

As promised, we’ll start by defining bid bonds before getting into the final details. Don’t be discouraged; we’re explaining it as simply as possible. No tricky jargon here!

 

What Are Bid Bonds?

Bid bonds are essentially financial promises. They tell the project owner that you’ve submitted a bid for a job in good faith and you intend to commit to the contract at the price you’ve quoted. In other words, bid bonds guarantee the project owner that you’ll proceed with the job based on your proposed contract.

While they’re seen most often in the construction industry, other contract-based business sectors also utilize them.

They aren’t always mandatory, but project owners insist you include one within your bid submission for most competitive bid processes. If you win the job but refuse or fail to enter the contract with the owner, the surety (bonding company) compensates the owner.

The specific compensation amount depends, of course, on the project particulars and your bid. However, the general calculation is as follows:

owner compensation (capped at the bid bond amount) = your bid price – the bid price of the runner up bidder

The Canadian Construction Documents Committee oversees the construction bonding market sector and poses standard bid bond forms for the whole country to use.

 

 

 

 

Remember These Three Key Bonding Terms

When dealing with bid bonds (and other construction bond types), you’ll often come across the terms principal, surety, and obligee.  Because of that, it’s worth fully understanding their definitions, all of which you can find below:

• Principal — The principal is the contractor. In this case, you.
• Surety — Surety is the bonding company (i.e., us) that gives you the bond.
• Obligee — The obligee is the person we guarantee to pay if you default on the job and they make a claim.

 

So, Bid Bonds Are Basically a Type of Insurance, Right?

Not exactly. Even though some entities like to use the term “bid bond insurance,” they’re different assurances.

To get bid bonds, you must qualify. But to get insurance, you don’t need to qualify; you just apply and choose the policy with the best value for money. 

In simpler terms, companies can deny your bid bond application, but insurers can’t deny your application (they just charge higher premiums).

 

How Do Bid Bonds Work?

People love to spew legal jargon when explaining how bid bonds work. And yes, we understand the importance of this when dealing with the actual paperwork (we’re a construction bond broker, after all). But, we will strip all that unfamiliar language back for now, so we can ensure you get to grips with the inner workings.

 

Bid Bonds Work Like This:

1. You qualify for the bid bond — We’ll discuss how to qualify for bid bonds as a construction contractor in detail later on. For now, we’ll focus on giving you an outline of the process.
2. We set up your account — As long as you qualify for a bid bond from one of our providers, they open a bond account in your name.
3. You consider the limits — Like credit cards, bond accounts come with limitations. You can withdraw bonds for projects within the agreed financial boundaries. If you decide to join the bidding process for a higher-cost job or projects outside your typical work, you need to gain separate bid bond approval.
4. New project? New bond application — Every time you wish to bid for a new project, you must submit another application. Once you’re set-up, our expert team can help you do it.
5. Give formal bonding at the tender stage — As soon as you and the obligee reach the tender stage, you give the formal bid bond and consent of surety. Sometimes, project owners require one or the other, but you need to provide both for most jobs.

 

What Is a Consent of Surety?

Typically required alongside the bid bond, a consent of surety or surety’s consent is a legally binding document between the surety or bond provider and the project owner (obligee). It formalizes certain aspects of the contract, such as:

• Interest rates
• The conditions of the sale
• The price of the sale
• Redemption provisions
• The conditions that allow the contract to be voided

The agreement also ensures you complete the job to a satisfactory standard and guarantees full payment for your efforts.

Sometimes, the consent of surety document is used to change the order of work and contract proceedings. 

 

Who Needs a Bid Bond?

Plenty of contractors require bid bonds. A good example is a mechanic contracted to upgrade an HVAC system in a sports stadium or a general contract building a new city hospital. But other contractors who made need bid bonds include:

• Heavy civil contractors
• Snow removal and landscape contractors
• Electrical and mechanical contractors
• Sewer and water main contractors
• Road paving contractors

The use of bid bonds has boomed in recent years as several provinces decided to re-do their Construction Acts. The first to finish the revamp was Ontario. Here, bid bonds are mandatory on publicly-funded jobs worth over $500,000.

Amazingly, this affected the private construction sector too. Now, many consultants stipulate bid bonds as a requirement under their tender specifications.

Additionally, you’ll need bid bonds if you plan to work with the following types of public owners:

• Hospitals
• Defence construction
• Ministry of Transportation Ontario
• Municipal owners
• School boards
• Public Works Canada

 

Why Do You Need a Bid Bond?

The main reason behind acquiring a bid is to prove to your potential client that your bid is serious and you made it in good faith. It gives them peace of mind that you will go into the contract and do the work for the quoted price.

Moreover, it prevents less-than-qualified contractors or companies from bidding for a project just to win the client and changing the type of work or the price upon entering the deal.

For example, if you don’t honour the terms of your bid, your client needs to find a different contractor to complete the work, resulting in project delays, wasted time, and potentially unnecessary spending. Having a bid bond in place means the surety compensates your client so they don’t lose out.

Even if the project owner or developer doesn’t specify having a bid bond, we’d recommend acquiring one. It signifies your seriousness and boosts your professionalism ten-fold.

 

How to Qualify for Bid Bonds as a Construction Contractor

Qualifying for a bid bond isn’t easy, but with our guidance, it doesn’t have to be overly burdensome either. Think of it like applying for a credit card or other financial loan; the process is similar. Essentially, you need to prove just two things to qualify:

• That you are financially able to complete the job you’re proposing
• That you have the professional and practical capability to complete the job you’re bidding for

The stronger your financial climate, the easier you can get bonds. Our experienced brokers at ConstructionBond can help put together a water-tight application to boost your chances of gaining approval for your bid bond request.

Speaking of the application, let us discuss this part of the process in more detail as it’s the difference between denial and acceptance. 

You can also read our article on how do I qualify my company to be able to bid on jobs if you would like learn more about the qualification process.

 

The Bid Bond Pre-Qualification and Application Process

Every bond comes with its own application requirements, so it’s important to ensure you’re completing the correct one before moving ahead.

We won’t lie — it’s a lengthy, time-consuming process. But, that’s only because you and your entire company must be scrutinized to determine whether you can complete the specified project.

To accurately assess your capabilities, you need to supply a variety of information, documents, and details. The specifics can vary from project-to-project and bond-to-bond, but it can include some or all of the following (we’ll let you know beforehand):

• Equipment proof — You may need to supply an inventory of your tools and other equipment to prove you can do the work.
• Education and experience proof — Your resume is reviewed to ensure you can do the work. If you have employees that will also work on the project, they need to supply their resumes for the same reason. You might also need to submit an organizational chart that features your most prominent employees plus their responsibilities.
• Continuity plan — While it’s unpleasant to think about, a continuity plan is necessary to make sure your company can fulfill operations as normal following your (or the company owner’s) death. Some surety companies we work with may ask you to list the company on your life insurance as a beneficiary.
• References — Obtain references from past developers, subcontractors, and engineers to reassure the surety entity that you work seamlessly with others.
• Personal financial statements — To give the surety issuer a well-rounded picture of you and your company, you must provide them with your personal bank statements.
• Contractor’s questionnaire — Perhaps the most common requirement, it provides the surety issuer with a lot of information about your construction background, past work, and your company’s history.
• Insurance — You must have protection in case an accident occurs. Without insurance, you won’t qualify for a bid bond (or other bond types, for that matter).

Additionally, you can also have a look at our article on how to apply for bid bonds if you would like to take a get a better understanding of the application process.

 

Alongside these documents, you must complete a bid bond application form that asks for the following information:

• The full name, phone number, and address of the obligee
• Your full name and address
• Your phone number
• Contract details, including a start and completion date
• The location of the development
• The contract price (an estimation, at least)
• The number of outstanding bids (both unbonded and bonded jobs)
• The scope of work as detailed in the contract

Providing all the documents at the beginning ensures the process is as seamless and stress-free as possible. 

 

Other Types of Bonds You Might Need Once You Are Hired For The Project

Upon acceptance of your bid, you might need to acquire other bonds to secure different parts of the project. A plethora of options exist, some of which may apply to your situation, such as:

• Performance bonds — With this type of bond, you’re guaranteeing you’ll perform the contracted obligations in line with the terms and conditions. Usually, they add to 50% of the contract amount but sometimes rack up to 100%.
• Maintenance bonds — Maintenance bonds ensure you’ll maintain the owner’s project and rectify any subpar workmanship upon the completion of the project, depending on the predetermined time frame.
• Payment bonds — You acquire payment bonds to guarantee you and other entities involved with the project are paid. In other words, they save you from the stresses of non-payment. Government contracts refer to payment bonds as Miller Act Bonds.
• Site improvement bonds — This type of bond is used for contracts involving work on a pre-existing property. They ensure you do the stated work, nothing more, nothing less.
• Subdivision bonds — Subdivision bonds are similar to site improvement bonds, but instead of dealing with pre-existing structures, they apply to building brand new ones. 
• Labour and material bonds — A labour and material bond guarantees you will purchase all the goods or services required for the bonded job.
• Bad credit bond — Essentially, this is the bond you can acquire if your company has a poor credit score.
• Fiduciary bonds — A fiduciary bond is a kind of insurance that protects you from a myriad of issues, including embezzlement and fraudulent activity.

 

The Cost of Bid Bonds

The bid bond itself is free; there’s no upfront fee or a premium. However, you can’t get a bid bond or any other type of bond without opening a bond facility, which comes with annual charges.

Consider your bond facility as a yearly subscription that grants you permission to take out bonds. The specific cost of this account (i.e., bond facility) depends on a variety of factors, including the following:

• The underwriter fees
• The amount of the contract
• The duration of the project
• The credit rating of your company (and potentially the state of your personal finances too)

Generally speaking, bid bonds are Free. You pay for bonds after you win the job. Usually 1% of the project value. Click here to read a more detailed explanation regarding the cost of bid bonds.

 

Do Bid Bonds Last Forever?

We receive this question a lot, so let’s finally put it to bed — no, bid bonds do not last forever. Like performance bonds, bid bonds expire, but the terms vary depending on the provider.

As soon as the pre-defined time frame ends, the bond needs to be extended or renewed. If you fail to do either, you may face rather negative consequences.

The most important thing to remember, however, is that they expire, and the period is set when you acquire the bond. Not to mention that it’s very unlikely for a bid bond to expire before the project owner reaches a decision or fulfills a contract obligation.

 

Not All Bonds Were Created Equally

Yes, we just explained that you can renew bonds. But sadly, that’s not always the case. The type of bond and the obligee determine whether you can renew or extend it.

 

How to Renew Bid Bonds

In rare circumstances, renewing your bid bond may become necessary. At which point, it’s vital to know how to go about it.

But let’s talk about fees first.

As you can probably imagine, renewal fees exist — and the responsibility for paying them falls to you (the principal). The charges vary based on your claim history, the surety company, and your credit score. There’s also a possibility of receiving a renewal denial if you fail to meet the initial bond requirements.

When it comes to the process, you’ll be delighted to know that it’s nowhere near as hard as applying for a new bid bond. The surety company still assesses the risks of bonding with you, but you stand more chance of gaining acceptance as they would’ve bonded with you beforehand.

 

Why Choose ConstructionBond for All Your Bid Bond Needs?

Finding the right bid bonds on your own is hard work — why not let us take the pressure off? At ConstructionBond, we have access to all kinds of bid bond providers, and you’ll benefit from a staggering wealth of industry experience.

Our team helps you from start to finish. We don’t leave you wondering, “where do I go from here?” Instead, we provide full support every single step of the way to ensure you’re in the know at all times.

 

To Bid Bond or Not to Bid Bond

By now, you’ll know that you definitely should get your hands on bid bonds when fighting for a project, even when it isn’t a mandatory requirement.

But you’ll also understand that you don’t have to traverse these sometimes murky waters on your own. Our team at ConstructionBond is here to help.

From prequalification to success, just get in touch to start the process.